Psychological Dominance, Market Dominance and Their Impacts on Price Stability in Turkey

Abstract

The study focuses on analyzing an economy that applies inflation targeting rule where the policy interest rate is determined actively by the Taylor rule. However, following the interest rate rule, the policy maker involuntarily becomes the affirmant of inflation. As a result, the apriori target and posteriori result contrast in terms of price stability. Therefore, the achievement of price stability is involuntarily negatively affected. In an economy that applies inflation targeting policy where interest rates are determined with a Taylor type rule, the establishment of price stability could be negatively affected, the financial stability might be harmed following the determination of policy interest rates. Hence, the Central Bank might fall into a position where it should assent inflation. By moving from the Turkish example, the main problem in the policies of Central Bank of Turkey is the difference between the borrowing and lending rates and its possible inflationary effects.

Keywords: Inflation, Central Bank,Taylor Rule, Nonlinear econometrics, TAR

JEL Classification: E31, E58, C50