Project: Inflation Targeting in Turkey

PhD project: De Facto Monetary Policy under Inflation Targeting in Turkey
Zeynep M. Nettekoven, PhD candidate at Freie Universität Berlin
Supervisors: Prof. Dr. Barbara Fritz (Freie Universität Berlin); Prof. Dr. Hansjörg Herr (Hochschule für Wirtschaft und Recht Berlin)

Time Period:  10/2010 – 7/2016


Inflation targeting has become a favored monetary policy strategy since the early-1990s in both developed and developing countries. Turkey has followed this track in the post-2001 period, namely after a major financial crisis. There is a growing body of theoretical and empirical literature about the dependency of peripheral economies’ monetary policy on the international monetary and financial system. Given that Turkey is a typical example of a peripheral economy, the main research question that this study poses is whether de facto monetary policy has been in line with the de jure form – inflation targeting – in the post-2001 period and, if not, in what ways and to what extent has the de facto form of monetary policy differed from the de jure form. To answer this research question, a monetary policy reaction function has been constructed as the first dimension of the theoretical framework. The monetary policy reaction function has been estimated from a backward-looking perspective based upon a vector auto-regression (VAR) model and from a forward-looking perspective based upon an ordinary least squares (OLS) method. As the second dimension, certain policy scenarios regarding the reaction of the interest rate to (expected) exchange rate and (expected) inflation rate have been set forth. Descriptive statistics have been used to bring empirical support to the policy scenario analysis. The research results show that the de facto monetary policy of Turkey has considerably differed from inflation targeting in the sense that (expected) exchange rate has been the main determinant of policy interest rate, whereas the (expected) inflation gap and (expected) output gap had no significant influence. This type of monetary policy can be considered as exchange rate targeting. Furthermore, some indicators show that Turkey’s de facto monetary policy has been externally dependent. There is also an indication that additional policy instruments and domestic financial system regulations might have weakened this dependency as of late 2010. In short, inflation targeting has been dysfunctional in Turkey. When Turkey was convinced by this dysfunctionality in late 2010, monetary policy was highly modified, which is an important policy step towards a more domestic-oriented monetary policy.


  • "The Fragile Growth Regime of Turkey in the Post-2001 Period", co-authored by Hansjörg Herr. November 2014, New Perspectives on Turkey, No. 51, pp. 35-68.
  • "Neoliberal Unshared Growth Regime of Turkey in the Post-2001 Period", co-authored by Hansjörg Herr. November 2013, Working Paper No. 19, Global Labour University, ILO.