Inflation Targeting in Turkey

Abstract

Inflation targeting strategy has emerged as the result of new pursuits and researches actualized due to insufficiency of monetary policies — implemented for price stability by the central banks until 1990s — in reaching the required consequences in both developed and developing countries, and this strategy had initially been implemented in New Zealand. As this strategy has indicated a successful performance since its implementation, it has become a targeting strategy that many countries struggling with high inflation — including Turkey — prefer and put into practice. In this study, the inflation targeting policy’s conformity to country’s economic cycle, its success, and its effect on macroeconomic factors were analyzed via the model formed by the use of GDP, exchange rate, CPI, interest rate, output gap, and crude oil prices. Inflation targeting regime was examined for the period of 1996:1-2018:4 via the VAR Model, Granger Causality Test, and action-reaction analyses. The results obtained have indicated the presence of expectation and cost inflation, and that it is triggering the inflation. Moreover, it has been observed that inability to reach the targeted value, and inclining trend of inflation are causing uncertainty of inflation.