Can Inflation Targeting Regimes Be Effective in Developing Countries? The Turkish Experience

Posted: 26 May 2010 Last revised: 19 Dec 2011

See all articles by Ali M. Kutan

Ali M. Kutan

Southern Illinois University at Edwardsville

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Date Written: May 26, 2010

Abstract

In 2002, the the Central Bank of Turkey (CBT) shifted to an implicit inflation targeting framework (IIT) that encompassed the most of core attributes of an official IT regime. Successful disinflation and progress in the policy environment led to the introduction of full-fledged IT in 2006 that brought further transparency to the monetary policy framework. We found Turkey’s new monetary approach to be an effective framework with more progress to come. Our judgment is based on three broad conclusions pointed at by empirical analyses. First, fiscal stability is an effective tool for a successful monetary policy. Second, the CBT’s overnight policy rate is a significant determinant of the changes in market lending rates, which is the preliminary step in the monetary transmission mechanism. Third, recent developments on the broader issue of the effectiveness of interest rate policy in controlling inflation through aggregate demand management and through other channels is encouraging. Based on our findings, we can argue that the impact of policy rate changes on economic activity and inflation have become more predictable and changed in the direction in line with theory, improving the transmission capacity of monetary policy.

Suggested Citation

Kutan, Ali M. and Yilmazkuday, Hakan, Can Inflation Targeting Regimes Be Effective in Developing Countries? The Turkish Experience (May 26, 2010). Journal of Asian Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1616190

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://faculty.fiu.edu/~hyilmazk/

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