Monetary Policy in Turkey in the 2000-2008 Period

Abstract

In this study we provide a critical account of the monetary policy of the 2000-2008 period in Turkey. The fixed exchange rate regime cum monetary targeting policy which had been implemented since the beginning of 2000 collapsed with the November 2000-February 2001 crisis. The root cause of the crisis was the fragile banking sector The rescue operation of the banking sector sky-rocketed the public debt to GDP ratio. In the aftermath of the crisis fiscal dominance and weak banking sector severely constrained the conduct of monetary policy. The Central Bank of Turkey halted the monetary targeting regime which was put in place in the aftermath of the crisis at the end of 2001. The 2002-2005 was the implicit inflation targeting period which was replaced by formal inflation targeting at the beginning of 2006 Throughout both of the inflation targeting periods floating exchange rate regime was implemented. We discuss the role of the monetary policy in the way to the crisis, reasons behind opting for implicit inflation targeting and draw some economic policy lessons from the Turkish experience.