Asymmetry in Inflation Targeting

Topics in Middle Eastern and African Economies,Proceedings of Middle East Economic Association, Vol. 19, Issue No. 1, May 2017

27 Pages Posted: 3 Oct 2018

See all articles by Erhan Aslanoglu

Erhan Aslanoglu

Piri Reis University - Department of Economics and Finance

Pinar Deniz

Marmara University - Department of Economics

Date Written: May 1, 2017

Abstract

Following the world financial crisis beginning in the last quarter of 2008, aggregate demand and commodity prices have declined sharply leading to a fast decline in world inflation. This different and new period reflects the rise in risk appetite leading to high fluctuations in the short term capital flows. World central banks revised their monetary policy to the changing conditions taking into account financial stability. In 2002, Turkish central bank adopted inflation targeting (in the implicit form) to maintain price stability. After 2008, following the developments in global markets, Turkish economy reflects similar characteristics in the form of decline in inflation rates. Together with the changes in the economic conditions, estimating monetary policy models in the form of constant-coefficient and symmetric specification may lead to erroneous interpretations. This study analyze the existence of structural break(s) and asymmetric behavior for the 2003-2016 period. The paper also examines the monetary policy model under New Keynesian fashion. Turkish monetary policy investigated for the period presents October 2009 as the break point under different models and structural break tests. Asymmetric reactions to interest rate, output and exchange rate are observed suggesting the different monetary preferences of the central bank of Turkey.

Keywords: Inflation Targeting, Turkey, Structural Break, Asymmetry, New Keynesian DSGE Model

JEL Classification: C32, E31, E52

Suggested Citation

Aslanoğlu, Erhan and Deniz, Pinar, Asymmetry in Inflation Targeting (May 1, 2017). Topics in Middle Eastern and African Economies,Proceedings of Middle East Economic Association, Vol. 19, Issue No. 1, May 2017. Available at SSRN: https://ssrn.com/abstract=3247363 or http://dx.doi.org/10.2139/ssrn.3247363

Erhan Aslanoğlu

Piri Reis University - Department of Economics and Finance ( email )

Turkey

Pinar Deniz (Contact Author)

Marmara University - Department of Economics ( email )

Istanbul
Turkey

HOME PAGE: http://https://sites.google.com/site/pinardenizresearch/

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