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Unformatted text preview: racksthe FED’s interest rate decisions. The Taylor rule is stated as follows: interest rate target= current inflation rate + equilibrium interest rate+ 0.5 (inflation gap)+ 0.5 (output gap) Where; Inflation gap = Current inflation rate­target rate Output gap= % deviation of real GDP from full employment level (potential GDP) 25 Inflation Targeting in Turkey 26 Turkish Experience ► Implicit Inflation Targeting: 2002­2005 ► Fully fledged IT: 2006 onwards In the aftermath of the 2001 crisis before the implicit IT has started Floating exchange rate regime was introduced CB law was amended to increase the CB’s independence ► Primary goal of CB is defined as price stability ► Credit to public sector is eliminated “Strengthening the Turkish Economy­Turkey’s Transition Program” was launched which addressed two main issues: Chronic inflation and high public debt. 27 The policy between 2002­2005 is defined as inflation targeting because: ► Price stability as primary objective ► A unique numeric target for annual inflation ► Short­term interest rate as policy instrument It was also “implicit” because: ► Preconditions were not yet fulfilled ► Base money used as temporary anchor 28 Inflation Targeting Practice ► Point Target: End­year CPI ► Uncertainty Bands: +/­2 percentage points ► Target Horizon: 3­year horizon ► Forecast Horizon: 6 quarters ► Policy Instrument: O/N rate, since 2010 one week repo rate ►...
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