Download Observations on the Practice of Central Banking in Turkey

Observations on the Practice
of Central Banking in Turkey
Refet S. Gürkaynak
Bilkent University
Three steps to central banking
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Make a forecast about the future state
of the economy
Decide on the overnight interest rate
that will steer the economy toward a
desired direction
Implement the policy in the money
market
Forecast the future state of the
economy…
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
Use historical relationships between variables
Difficult in Turkey—history is too “different”
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1970’s: Mostly closed economy
1980’s: Nonconvertible lira
1990’s: Boom-bust cycles
After 2001: Mostly “normal” economy
What does a 10% increase in oil prices do?

In the US? In Turkey?
Decide on optimal policy
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Difficult for the reason above
Little information on the transmission
mechanism
What does monetary policy do? How does
it work in Turkey?
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Depends on the perception of the fiscal
situation, state of the world business cycle…
The evolving credibility of the central bank
A friend having similar
difficulties
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The European Central Bank
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Short history
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German reunification
Changing definition of eurozone
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New countries being added
Evolving policy framework
Evolving credibility
Given these difficulties
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All the more remarkable performance
from the Central Bank of Turkey over
the past five years
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Successful disinflation
Improved communication
Increased credibility
Inflation Targeting in Turkey
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Timely
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After successful disinflation
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When economy stabilized
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IT began with a well regarded central bank
Less need for credibility building
Agents began to have a longer horizon
Needed guidance, anchoring
Important communication tool
IT has helped…
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…during the recent fluctuation
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The central bank only needed to
display commitment to an already
known target

Not having to communicate policy
objective when markets have seized up
helps
Impact of the 175 bp rate hike
on the yield curve
From Akıncı et. al (2006)
Credibility building in practice
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The rate hike has led to higher interest
rates up to a year
But to lower rates after a year
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Rates lower because of lower expected
inflation and inflation risk
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Displayed commitment to the inflation target
Leading to increased credibility
Conclusions
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After 2001 Turkey is more like the normal,
textbook economy
But we are still learning about the economy
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Including the central bank
Central bank has been successful in tough
circumstances
Credibility building is continuing
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Learning about the central bank by the public
Eventually the central bank will not have to signal
commitment—it will be known