Assessment inflation targeting regime from the end of

of Implementation of CRBT’s New Policy Mix         After 2010: Financial Stability and
Monetary Policy Together


Central Bank has implemented the full-fledged inflation targeting regime since
2006 in order to achieve the main purpose of price stability. The Bank has
developed a new monetary policy strategy by improving the inflation targeting
regime from the end of 2010 in order to keep macro financial risks as a
reflection of global imbalances under control. In this new policy mix, CBRT include
in the scope of financial stability into inflation targeting regime by make use
of complementary instruments. In this study, I will asses this new policy by
utilizing Financial Stability and Monetary Policy (Erdem Ba?ç? Hakan Kara)
article. By the time the article published it was the early stage of policy
implementation and they looked at initial results, however after 7 years we’re
able to assess impact of implementation.






















of New policy


Before 2010, CBRT’s main
objective was price stability and the only policy tool was short term interest
rates. Forecast of macroeconomic variables and predictability of macroeconomic relations
caused a misunderstood of economic dynamics can be described by a simple
framework during the period of “great moderation” (from 1990s to mid-2000s).

(Kara, H. et al) However, this was not lasted long, after the global crises,
the consensus on the monetary policy is not continued anymore. On the other
hand, there is an increase in the concurrence of central banks should also consider
financial stability together with price stability. Therefore, the need of
designing new policy mix problem came to the stage, which instruments should be
used to deal with financial stability. Therefore, it is realized that economic
dynamics are more complicated than it is seen as a simple framework before the
global crisis.


To reach this new objective
and to taking into consideration to macro-financial risks that causes from
global imbalances, CBRT developed a new monetary policy framework by making
adjustments on the inflation targeting framework. Due to the diversity of
objectives, the policy instruments are also diversified. These are the one-week repo
auction interest rate, the interest rate corridor between the overnight lending
and borrowing rates at the Interbank Money Market and the ?stanbul Stock Exchange Repo-Reverse Repo Market.


1.2 Policy Framework











seen in the figure 1.2 B below, inflation expectations remain quite stable in     initial implementation period and there is
a downward trend until the 2014. This is a good sign of new policy does not
worsen the inflation expectations it even improves for four years. After the
2014, we see an upward trend until 2016 this can be because of depreciation of
TL or other endogenous and exogenous factors. Hence we can see good signs of
new policy mix and no need to worry about deterioration in inflation


1.2 Monetary Policy and Inflation Expectations

Central Bank faces an policy
trade off between high inflation requires a tight monetary policy and high
interest rates that will cause capital inflows which increases domestic credit
and appreciate domestic currency. Hence in that direction central bank
implement policy mix to handle volatile capital flows and also to achieve inflation
target by operating an unorthodox interest rate corridor and containing
domestic demand. These policies helped to stabilize exchange rate, however
inflation target is not reached as seen in the figure 1.2 panel A


Under exceptionally
supportive global financing conditions and a fully open capital

account, the central
bank continues to face an acute monetary policy dilemma: on the  one hand, high domestic inflation calls for
tight monetary policy; on the other hand, high

interest rates tend to draw in capital
inflows that fuel domestic credit and push up the real

exchange rate. So far the central bank
has handled this tension by operating an

unorthodox interest-rate corridor,
meant to help lean against volatile capital flows

(Figure 12, Panel A). At the same time
it tried to contain domestic demand with the help of an active macro-prudential
policy. This instrument mix helped stabilise the real exchange rate, but failed
to achieve the inflation target. The credibility of the target is currently
very low (Figure 12, Panel B), while the Central Bank aims at regaining
credibility in the short term by anchoring inflation expectations around its
forecasts (as in some past episodes, see Ba?kaya et al., 2012). The
central bank projects that, under current policies, inflation will converge to
target in 2018. However, there is a risk that inflation will fall considerably
less, in which case monetary policy will need to be tightened to bring
inflation back towards the target and prevent further erosion of central bank
credibility. Policymakers and social partners can support central bank’s
efforts to regain credibility by moderating wage and price pressures. The
official minimum wage is earned by a large number of workers, has spill-over
effects throughout the entire wage spectrum and is determined by a commission
where government, employee and employer representatives are equally
represented. Consensus between social partners on a sustainable real wage path
may help achieve disinflation. International experience suggests that minimum
wage policy settings avoiding rigid nominal indexation on price or wage
inflation can be helpful (OECD, 2015k).

The credibility of the central bank would be improved by
further narrowing the policyinterest-

rate corridor, in line with what has been recommended in
the previous OECD

Economic Survey (OECD, 2014a) and more recently by the
IMF (IMF, 2016). Indeed, the

current 7.25% to 9.00% corridor is still relatively wide
by international standards.