Geleneksel faiz koridoru sistemlerinde merkez bankalari para politikasini tek bir politika faizi ... more Geleneksel faiz koridoru sistemlerinde merkez bankalari para politikasini tek bir politika faizi uzerinden yurutmekte ve bankalarin kisa vadeli fonlama maliyetinin bu faize yakin gerceklesmesini saglamaktadir. Ote yandan, Turkiye Cumhuriyet Merkez Bankasi (TCMB) 2010 yilinin sonlarindan itibaren finansal oynakliga vakitli tepki verebilmek amaciyla sira disi bir faiz koridoru ve fonlama politikasi uygulamistir. Bu dogrultuda, TCMB’nin piyasaya sagladigi kisa vadeli fonlarin kompozisyonu yuksek frekanslarda degistirilerek gerekli gorulen donemlerde piyasa faizlerinin TCMB fonlama faizinden ve ilan edilen resmi faizlerden sapmasi tercih edilmistir. Konvansiyonel olmayan bu yaklasimda, para politikasinin finansal sistemle etkilesimi de klasik faiz koridoru uygulamasina kiyasla daha karmasik bir yapi almaktadir. Bu calisma, anilan donemde para politikasi durusunun ve parasal aktarim mekanizmasinin daha iyi anlasilmasina katkida bulunmayi amaclamaktadir. Calismada ozellikle sira disi koridor politikasi kapsaminda merkez bankasi tarafindan ilan edilen faizler (resmi faizler) ile bankalarin fiiliyatta maruz kaldiklari faizler (fiili faizler) arasindaki farklilasmanin parasal aktarim mekanizmasi acisindan yansimalari ele alinmaktadir. Bu dogrultuda, oncelikle TCMB’nin uyguladigi faiz koridoru politikasinin operasyonel cercevesi basit bir gosterimle sunularak para politikasinin etki alanindaki faizlerin bankalar acisindan onemi degerlendirilmektedir. Daha sonra da panel tahmin yontemleri ile banka bazinda akim veriler kullanilarak kredi ve mevduat faizleri ile para politikasi faizleri arasindaki iliski incelenmektedir. Bulgularýmiza gore, para politikasinin bankacilik sistemine aktarimi acisindan resmi faizlerden ziyade fiili faizler one cikmaktadir. Ozellikle bankalararasi gecelik piyasada olusan faizin kredi ve mevduat fiyatlamasinda belirleyici rol oynadigi gozlenmektedir.
Comparative Political Economy: Monetary Policy eJournal, 2016
The global financial crisis have led to a reassessment of macroeconomic policy formulation across... more The global financial crisis have led to a reassessment of macroeconomic policy formulation across the globe. As a consequence, countries have expanded their policy toolkits with macroprudential policies in recent years to deal with macro financial risks. The heightened volatility in capital flows during the post-crisis period has led to significant challenges especially for emerging economies by worsening policy trade-offs. Such an environment made additional tools of macroeconomic and financial policy more valuable.Full publication: Macroprudential Policy
This paper investigates the changing behavior of inflation expectations in response to the macroe... more This paper investigates the changing behavior of inflation expectations in response to the macroeconomic and policy environment. Using a panel of professional forecasters covering thirteen years of inflation targeting period from Turkey, we present evidence on the behavioral shifts in the inflation expectations associated with evolving macroeconomic and policy performance. We use a unique survey with the feature of including matched policy rate and fixed-horizon inflation expectations at the individual level, therefore enabling to estimate the impact of monetary policy surprises on inflation expectations without reliance on strong identifying assumptions. Moreover, we employ a novel technique where direct feedback from survey respondents is used to determine the baseline empirical model governing expectations dynamics. Interpretation of the empirical findings joint with the direct feedback results from the survey indicate that the anchoring power of inflation targets depend on the p...
Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-201... more Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-2011, called reserve options mechanism (ROM) in order to alleviate the adverse impact of capital flow volatility on the domestic economy. Although there are numerous studies on the mechanics of ROM, there has been no attempt to investigate the determinants of the ROM utilization in practice. In this paper, we aim to fill this gap by using bank-level data to assess the behavioral aspects of ROM. Our results suggest that the relative cost of Turkish lira funding to foreign currency funding as well as the reserve option coefficients set by the CBRT largely explains the variations in the ROM utilization. We find that the most relevant proxy for the cost of Turkish lira funding for banks is overnight money market interest rates and the weighted average cost of CBRT funding. Moreover, foreign currency liquidity does not seem to be a significant parameter in driving the utilization of ROM. We argu...
Many central banks in emerging economies have used reserve requirements (RR) to alleviate the tra... more Many central banks in emerging economies have used reserve requirements (RR) to alleviate the trade-off between financial stability and price stability in recent years. Notwithstanding their widespread use, transmission channels of RR have remained largely as a black-box. In this paper, we use bank-level data to explore the interaction between RR and bank lending behavior. Our empirical findings suggest that short-term borrowing from the central bank is not a close substitute for deposits for banks. Bank lending behavior responds significantly to reserve requirements and liquidity positions. Our analysis allows us to identify a new channel that we name as the “liquidity channel”. The channel works through a decline in bank liquidity and loan supply due to an increase in reserve requirements.
Although reserve requirements have been used in emerging markets to smooth credit cycles, the exa... more Although reserve requirements have been used in emerging markets to smooth credit cycles, the exact transmission mechanism remains to be explored. Using bank level data, this study looks inside the black-box to unveil the interaction of reserve requirement policy with bank lending. We identify a new channel that works through a decline in bank liquidity and loan supply due to an increase in reserve requirements. We show that "quantitative tightening" through reserve requirements affect the funding needs and the liquidity position of the banking system. The consequent changes in bank liquidity have a significant impact on the bank lending behavior.
The paper gives an overview over issues concerning the role of financial stability in monetary po... more The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks' objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank's succumbing to financial dominance?
Central Bank of Turkey (CBT) has been implementing a multi-instrument monetary policy strategy wi... more Central Bank of Turkey (CBT) has been implementing a multi-instrument monetary policy strategy within a wide interest rate corridor since 2010. In this approach, composition of the central bank liquidity provision is an important component of the policy stance. Therefore, interpreting the changes in the monetary policy decisions necessitates an understanding of the practical implementation of monetary policy. By presenting a simplified exposition of the CBT's operational framework, this note aims to answer questions such as (i) How are the short term interest rates determined? (ii) What is the implication of a change in the funding composition? (iii) Which interest rate is more relevant for the monetary transmission mechanism? We attempt to address these questions to provide some insight into the assessment of the monetary policy stance. 1 The views attributed in this study are those of the author's and cannot necessarily be attributed to the Central Bank of Turkey. I am grateful to Erdem Başçı, Koray Alper, Mahir Binici, Gürsu Keleş, Pınar Özlü and Deren Ünalmış as well the referee and the editors for useful contributions.
Central banks unexpectedly tightening policy rates often observe the exchange value of their curr... more Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality. It turns out that many informational assumptions make a standard twocountry New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event study and model implications for these. We find that there is heterogeneity in this dimension in the event study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event study analysis with model-based mechanisms of asset pricing.
Turkey started to implement an unconventional policy by utilizing several complementary instrumen... more Turkey started to implement an unconventional policy by utilizing several complementary instruments. Although it is too early to draw firm conclusions, initial results so far seem promising, suggesting that a lower policy rate, a wider interest rate corridor, combined with higher required reserve ratios may serve as an effective policy mix in dealing with rapidly increasing macro imbalances driven by short term capital inflows. Nevertheless, before recommending this approach to other central banks, it should be noted that country specific features should be taken into account while designing policies to deal with short term capital inflows. The exact content of the policy mix and the set of policy tools would depend on several factors such as the structure and institutional setup of the financial system, the nature of the capital flows, and the state of the domestic and external business cycles.
ABSTRACT Typescript. Thesis (Ph. D.)--New York University, Graduate School of Arts and Science, 2... more ABSTRACT Typescript. Thesis (Ph. D.)--New York University, Graduate School of Arts and Science, 2002. Includes bibliographical references (leaves 140-149).
The predominant role of cross border financial flows for macroeconomic and financial stability ha... more The predominant role of cross border financial flows for macroeconomic and financial stability has imposed complex policy trade-offs for emerging economies, especially after the global financial crisis. This note provides a brief account of the macroprudential policy approach adopted in Turkey between the years 2011 and 2015, a period when global capital flows exhibited unprecedented volatility. Special emphasis is put on the use of monetary policy tools for macroprudential purposes. We first highlight the particular role of external flows and the associated tradeoffs in designing the monetary policy and macroprudential policy framework. Next, we describe the policy implementation by the central bank and the regulatory authorities, and evaluate the consequent outcomes. Our analysis suggests that macroprudential policies have improved external balances, dampened financial amplification channels, and reduced the sensitivity of the Turkish economy to capital flows.
Heightened volatility in cross-border capital flows has increased exchange rate volatility across... more Heightened volatility in cross-border capital flows has increased exchange rate volatility across emerging markets as well as in advanced economies, setting the stage for more active management of currencies. Traditionally, foreign exchange rate intervention has been the primary tool to address these types of challenges. However, given the limitations of foreign exchange rate intervention, it may be well worthwhile to explore alternative mechanisms for dealing with capital flow volatility. This paper explains how the new policy framework adopted by the Central Bank of the Republic of Turkey (CBRT) in the past two years has eased the need to conduct FX interventions. We first describe the rationale for the new policy framework, which is an augmented version of inflation targeting, with more emphasis on macro financial risks. Next, we explain the new instruments developed by the CBRT and their contribution to coping with capital flow volatility. In particular, we focus on the Reserve ...
This study analyzes the behavioral aspects of inflation expectations in Turkey by utilizing data ... more This study analyzes the behavioral aspects of inflation expectations in Turkey by utilizing data from a panel of survey respondents, and draws implications for the formulation of monetary policy and communication strategy. Our results lend support to the view that the survey respondents take the inflation targets and the official forecasts of the Central Bank of Turkey into account in forming their expectations. We show that inflation expectations during the rapid disinflation episode of 2002-2005 were firmly anchored by the announced targets. Yet, the weight attached to past inflation and the sensitivity of inflation expectations to variables such as exchange rates and the risk premia seem to have increased in recent years. We also show that there is significant heterogeneity in the expectation formation process. Real sector attaches a greater weight to past inflation than the financial sector, suggesting that more effort should be devoted to communicating quantitative policy objec...
This paper compares the ability of different market instruments in terms of predicting monetary p... more This paper compares the ability of different market instruments in terms of predicting monetary policy decisions to find out which one best captures market participants’ policy expectations. Towards this end, policy rate expectations implied by various market instruments and different approaches are derived for the period between July 2006 and October 2009. Empirical results show that market based monetary policy expectations in Turkey can most successfully be obtained by using the one week Turkish Lira Interbank Bid Rate (TRLIBID).
Central banks unexpectedly tightening policy rates often observe the exchange value of their curr... more Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciating as predicted by standard models. We document this for Fed and ECB policy days using eventstudies and ask whether an information e ect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism we condition on reactions of longer term interest rates in the eventstudy and model implications for these. We nd that there is heterogeneity in this dimension in the eventstudy and no model with a single regime can match the evidence. Further, even after conditioning on the information e ects on longer term interest rates, there may be independent information in the reaction of exchange rates. JEL Cl...
Post-crisis spillovers and heightened capital flows have triggered a search for alternative monet... more Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for small open emerging economies. The Turkish experience since end-2010 sets out an interesting case in this respect. Faced with extreme volatility in cross-border capital flows, rapid credit growth and a sharp deterioration in the current account deficit, Central Bank of Turkey (CBT) has modified the conventional inflation targeting regime by adopting financial stability as a supplementary objective and enriching the set of policy instruments with a particular emphasis on credit and exchange rate channels. This study explains the underlying motivation why the CBT has adopted such a flexible policy, provides an overview of the new framework, and summarizes the initial results. The analysis conducted throughout the paper and the recent evidence suggests that the new policy framework has been quite effective in reducing the macro financial risks related t...
This paper describes the challenges faced during the implementation of implicit inflation targeti... more This paper describes the challenges faced during the implementation of implicit inflation targeting in Turkey and evaluates the transition process to full-fledged inflation targeting. Using this background, the paper draws lessons for similar countries considering inflation targeting as a monetary policy regime. We argue that, the strategy of starting inflation targeting with an "implicit" version and gradually converging to full-fledged targeting can be a viable option when certain set of conditions is not satisfied. We conjecture, however, that implementing a "light" version?namely implicit inflation targeting?does not necessarily mean that the system would be exempt from all the prerequisites. In the Turkish case, for example, institutional independence and political support seem to have been the fundamental conditions for initiating the process of inflation targeting.
Geleneksel faiz koridoru sistemlerinde merkez bankalari para politikasini tek bir politika faizi ... more Geleneksel faiz koridoru sistemlerinde merkez bankalari para politikasini tek bir politika faizi uzerinden yurutmekte ve bankalarin kisa vadeli fonlama maliyetinin bu faize yakin gerceklesmesini saglamaktadir. Ote yandan, Turkiye Cumhuriyet Merkez Bankasi (TCMB) 2010 yilinin sonlarindan itibaren finansal oynakliga vakitli tepki verebilmek amaciyla sira disi bir faiz koridoru ve fonlama politikasi uygulamistir. Bu dogrultuda, TCMB’nin piyasaya sagladigi kisa vadeli fonlarin kompozisyonu yuksek frekanslarda degistirilerek gerekli gorulen donemlerde piyasa faizlerinin TCMB fonlama faizinden ve ilan edilen resmi faizlerden sapmasi tercih edilmistir. Konvansiyonel olmayan bu yaklasimda, para politikasinin finansal sistemle etkilesimi de klasik faiz koridoru uygulamasina kiyasla daha karmasik bir yapi almaktadir. Bu calisma, anilan donemde para politikasi durusunun ve parasal aktarim mekanizmasinin daha iyi anlasilmasina katkida bulunmayi amaclamaktadir. Calismada ozellikle sira disi koridor politikasi kapsaminda merkez bankasi tarafindan ilan edilen faizler (resmi faizler) ile bankalarin fiiliyatta maruz kaldiklari faizler (fiili faizler) arasindaki farklilasmanin parasal aktarim mekanizmasi acisindan yansimalari ele alinmaktadir. Bu dogrultuda, oncelikle TCMB’nin uyguladigi faiz koridoru politikasinin operasyonel cercevesi basit bir gosterimle sunularak para politikasinin etki alanindaki faizlerin bankalar acisindan onemi degerlendirilmektedir. Daha sonra da panel tahmin yontemleri ile banka bazinda akim veriler kullanilarak kredi ve mevduat faizleri ile para politikasi faizleri arasindaki iliski incelenmektedir. Bulgularýmiza gore, para politikasinin bankacilik sistemine aktarimi acisindan resmi faizlerden ziyade fiili faizler one cikmaktadir. Ozellikle bankalararasi gecelik piyasada olusan faizin kredi ve mevduat fiyatlamasinda belirleyici rol oynadigi gozlenmektedir.
Comparative Political Economy: Monetary Policy eJournal, 2016
The global financial crisis have led to a reassessment of macroeconomic policy formulation across... more The global financial crisis have led to a reassessment of macroeconomic policy formulation across the globe. As a consequence, countries have expanded their policy toolkits with macroprudential policies in recent years to deal with macro financial risks. The heightened volatility in capital flows during the post-crisis period has led to significant challenges especially for emerging economies by worsening policy trade-offs. Such an environment made additional tools of macroeconomic and financial policy more valuable.Full publication: Macroprudential Policy
This paper investigates the changing behavior of inflation expectations in response to the macroe... more This paper investigates the changing behavior of inflation expectations in response to the macroeconomic and policy environment. Using a panel of professional forecasters covering thirteen years of inflation targeting period from Turkey, we present evidence on the behavioral shifts in the inflation expectations associated with evolving macroeconomic and policy performance. We use a unique survey with the feature of including matched policy rate and fixed-horizon inflation expectations at the individual level, therefore enabling to estimate the impact of monetary policy surprises on inflation expectations without reliance on strong identifying assumptions. Moreover, we employ a novel technique where direct feedback from survey respondents is used to determine the baseline empirical model governing expectations dynamics. Interpretation of the empirical findings joint with the direct feedback results from the survey indicate that the anchoring power of inflation targets depend on the p...
Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-201... more Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-2011, called reserve options mechanism (ROM) in order to alleviate the adverse impact of capital flow volatility on the domestic economy. Although there are numerous studies on the mechanics of ROM, there has been no attempt to investigate the determinants of the ROM utilization in practice. In this paper, we aim to fill this gap by using bank-level data to assess the behavioral aspects of ROM. Our results suggest that the relative cost of Turkish lira funding to foreign currency funding as well as the reserve option coefficients set by the CBRT largely explains the variations in the ROM utilization. We find that the most relevant proxy for the cost of Turkish lira funding for banks is overnight money market interest rates and the weighted average cost of CBRT funding. Moreover, foreign currency liquidity does not seem to be a significant parameter in driving the utilization of ROM. We argu...
Many central banks in emerging economies have used reserve requirements (RR) to alleviate the tra... more Many central banks in emerging economies have used reserve requirements (RR) to alleviate the trade-off between financial stability and price stability in recent years. Notwithstanding their widespread use, transmission channels of RR have remained largely as a black-box. In this paper, we use bank-level data to explore the interaction between RR and bank lending behavior. Our empirical findings suggest that short-term borrowing from the central bank is not a close substitute for deposits for banks. Bank lending behavior responds significantly to reserve requirements and liquidity positions. Our analysis allows us to identify a new channel that we name as the “liquidity channel”. The channel works through a decline in bank liquidity and loan supply due to an increase in reserve requirements.
Although reserve requirements have been used in emerging markets to smooth credit cycles, the exa... more Although reserve requirements have been used in emerging markets to smooth credit cycles, the exact transmission mechanism remains to be explored. Using bank level data, this study looks inside the black-box to unveil the interaction of reserve requirement policy with bank lending. We identify a new channel that works through a decline in bank liquidity and loan supply due to an increase in reserve requirements. We show that "quantitative tightening" through reserve requirements affect the funding needs and the liquidity position of the banking system. The consequent changes in bank liquidity have a significant impact on the bank lending behavior.
The paper gives an overview over issues concerning the role of financial stability in monetary po... more The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks' objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank's succumbing to financial dominance?
Central Bank of Turkey (CBT) has been implementing a multi-instrument monetary policy strategy wi... more Central Bank of Turkey (CBT) has been implementing a multi-instrument monetary policy strategy within a wide interest rate corridor since 2010. In this approach, composition of the central bank liquidity provision is an important component of the policy stance. Therefore, interpreting the changes in the monetary policy decisions necessitates an understanding of the practical implementation of monetary policy. By presenting a simplified exposition of the CBT's operational framework, this note aims to answer questions such as (i) How are the short term interest rates determined? (ii) What is the implication of a change in the funding composition? (iii) Which interest rate is more relevant for the monetary transmission mechanism? We attempt to address these questions to provide some insight into the assessment of the monetary policy stance. 1 The views attributed in this study are those of the author's and cannot necessarily be attributed to the Central Bank of Turkey. I am grateful to Erdem Başçı, Koray Alper, Mahir Binici, Gürsu Keleş, Pınar Özlü and Deren Ünalmış as well the referee and the editors for useful contributions.
Central banks unexpectedly tightening policy rates often observe the exchange value of their curr... more Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality. It turns out that many informational assumptions make a standard twocountry New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event study and model implications for these. We find that there is heterogeneity in this dimension in the event study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event study analysis with model-based mechanisms of asset pricing.
Turkey started to implement an unconventional policy by utilizing several complementary instrumen... more Turkey started to implement an unconventional policy by utilizing several complementary instruments. Although it is too early to draw firm conclusions, initial results so far seem promising, suggesting that a lower policy rate, a wider interest rate corridor, combined with higher required reserve ratios may serve as an effective policy mix in dealing with rapidly increasing macro imbalances driven by short term capital inflows. Nevertheless, before recommending this approach to other central banks, it should be noted that country specific features should be taken into account while designing policies to deal with short term capital inflows. The exact content of the policy mix and the set of policy tools would depend on several factors such as the structure and institutional setup of the financial system, the nature of the capital flows, and the state of the domestic and external business cycles.
ABSTRACT Typescript. Thesis (Ph. D.)--New York University, Graduate School of Arts and Science, 2... more ABSTRACT Typescript. Thesis (Ph. D.)--New York University, Graduate School of Arts and Science, 2002. Includes bibliographical references (leaves 140-149).
The predominant role of cross border financial flows for macroeconomic and financial stability ha... more The predominant role of cross border financial flows for macroeconomic and financial stability has imposed complex policy trade-offs for emerging economies, especially after the global financial crisis. This note provides a brief account of the macroprudential policy approach adopted in Turkey between the years 2011 and 2015, a period when global capital flows exhibited unprecedented volatility. Special emphasis is put on the use of monetary policy tools for macroprudential purposes. We first highlight the particular role of external flows and the associated tradeoffs in designing the monetary policy and macroprudential policy framework. Next, we describe the policy implementation by the central bank and the regulatory authorities, and evaluate the consequent outcomes. Our analysis suggests that macroprudential policies have improved external balances, dampened financial amplification channels, and reduced the sensitivity of the Turkish economy to capital flows.
Heightened volatility in cross-border capital flows has increased exchange rate volatility across... more Heightened volatility in cross-border capital flows has increased exchange rate volatility across emerging markets as well as in advanced economies, setting the stage for more active management of currencies. Traditionally, foreign exchange rate intervention has been the primary tool to address these types of challenges. However, given the limitations of foreign exchange rate intervention, it may be well worthwhile to explore alternative mechanisms for dealing with capital flow volatility. This paper explains how the new policy framework adopted by the Central Bank of the Republic of Turkey (CBRT) in the past two years has eased the need to conduct FX interventions. We first describe the rationale for the new policy framework, which is an augmented version of inflation targeting, with more emphasis on macro financial risks. Next, we explain the new instruments developed by the CBRT and their contribution to coping with capital flow volatility. In particular, we focus on the Reserve ...
This study analyzes the behavioral aspects of inflation expectations in Turkey by utilizing data ... more This study analyzes the behavioral aspects of inflation expectations in Turkey by utilizing data from a panel of survey respondents, and draws implications for the formulation of monetary policy and communication strategy. Our results lend support to the view that the survey respondents take the inflation targets and the official forecasts of the Central Bank of Turkey into account in forming their expectations. We show that inflation expectations during the rapid disinflation episode of 2002-2005 were firmly anchored by the announced targets. Yet, the weight attached to past inflation and the sensitivity of inflation expectations to variables such as exchange rates and the risk premia seem to have increased in recent years. We also show that there is significant heterogeneity in the expectation formation process. Real sector attaches a greater weight to past inflation than the financial sector, suggesting that more effort should be devoted to communicating quantitative policy objec...
This paper compares the ability of different market instruments in terms of predicting monetary p... more This paper compares the ability of different market instruments in terms of predicting monetary policy decisions to find out which one best captures market participants’ policy expectations. Towards this end, policy rate expectations implied by various market instruments and different approaches are derived for the period between July 2006 and October 2009. Empirical results show that market based monetary policy expectations in Turkey can most successfully be obtained by using the one week Turkish Lira Interbank Bid Rate (TRLIBID).
Central banks unexpectedly tightening policy rates often observe the exchange value of their curr... more Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciating as predicted by standard models. We document this for Fed and ECB policy days using eventstudies and ask whether an information e ect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism we condition on reactions of longer term interest rates in the eventstudy and model implications for these. We nd that there is heterogeneity in this dimension in the eventstudy and no model with a single regime can match the evidence. Further, even after conditioning on the information e ects on longer term interest rates, there may be independent information in the reaction of exchange rates. JEL Cl...
Post-crisis spillovers and heightened capital flows have triggered a search for alternative monet... more Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for small open emerging economies. The Turkish experience since end-2010 sets out an interesting case in this respect. Faced with extreme volatility in cross-border capital flows, rapid credit growth and a sharp deterioration in the current account deficit, Central Bank of Turkey (CBT) has modified the conventional inflation targeting regime by adopting financial stability as a supplementary objective and enriching the set of policy instruments with a particular emphasis on credit and exchange rate channels. This study explains the underlying motivation why the CBT has adopted such a flexible policy, provides an overview of the new framework, and summarizes the initial results. The analysis conducted throughout the paper and the recent evidence suggests that the new policy framework has been quite effective in reducing the macro financial risks related t...
This paper describes the challenges faced during the implementation of implicit inflation targeti... more This paper describes the challenges faced during the implementation of implicit inflation targeting in Turkey and evaluates the transition process to full-fledged inflation targeting. Using this background, the paper draws lessons for similar countries considering inflation targeting as a monetary policy regime. We argue that, the strategy of starting inflation targeting with an "implicit" version and gradually converging to full-fledged targeting can be a viable option when certain set of conditions is not satisfied. We conjecture, however, that implementing a "light" version?namely implicit inflation targeting?does not necessarily mean that the system would be exempt from all the prerequisites. In the Turkish case, for example, institutional independence and political support seem to have been the fundamental conditions for initiating the process of inflation targeting.
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