Exchange Rate and Inflation Under Weak Monetary Policy: Turkey Verifies Theory

41 Pages Posted: 24 May 2022

See all articles by Refet S. Gürkaynak

Refet S. Gürkaynak

Bilkent University - Department of Economics

Burçin Kısacıkoğlu

Bilkent University - Department of Economics

Sang Seok Lee

Bilkent University

Multiple version iconThere are 3 versions of this paper

Date Written: 2022

Abstract

For the academic audience, this paper presents the outcome of a well-identified, large change in the monetary policy rule from the lens of a standard New Keynesian model and asks whether the model properly captures the effects. For policymakers, it presents a cautionary tale of the dismal effects of ignoring basic macroeconomics. The Turkish monetary policy experiment of the past decade, stemming from a belief of the government that higher interest rates cause higher inflation, provides an unfortunately clean exogenous variance in the policy rule. The mandate to keep rates low, and the frequent policymaker turnover orchestrated by the government to enforce this, led to the Taylor principle not being satisfied and eventually a negative coefficient on inflation in the policy rule. In such an environment, was the exchange rate still a random walk? Was inflation anchored? Does the “standard model” suffice to explain the broad contours of macroeconomic outcomes in an emerging economy with large identifying variance in the policy rule? There are no surprises for students of open-economy macroeconomics; the answers are no, no, and yes.

JEL Classification: E020, E310, E520, E580, F310, F410

Suggested Citation

Gürkaynak, Refet S. and Kısacıkoğlu, Burçin and Lee, Sang Seok, Exchange Rate and Inflation Under Weak Monetary Policy: Turkey Verifies Theory (2022). CESifo Working Paper No. 9748, Available at SSRN: https://ssrn.com/abstract=4118082 or http://dx.doi.org/10.2139/ssrn.4118082

Refet S. Gürkaynak (Contact Author)

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

Burçin Kısacıkoğlu

Bilkent University - Department of Economics ( email )

Bilkent University FEASS
Department of Economics
Bilkent, 06800
Turkey

Sang Seok Lee

Bilkent University ( email )

Bilkent, 06533
Turkey

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