Interest Rate Smoothing and Macroeconomic Instability under Post-Capital Account Liberalization Turkey

Abstract

This Working Paper studies how the interest rate policy of the Central Bank of the Republic of Turkey (CBRT) has evolved under the post-financial liberalization and deregulation era. Utilizing econometric methods on a generalized form of a Taylor Rule the authors search for the possible revelation of a variety of determinants of monetary policy with different objectives over 1994-2007. They find that over such an extended time horizon during which significant shifts in the macroeconomic environment have occurred, the CBRT’s almost exclusive focus on “interest rate smoothing” has not changed; and that the CBRT has not paid any attention to developments in national income. <p></p> This raises the question whether there is a deeper underlying structural constraint, binding the CBRT’s alleged “independence”. The authors trace the basics of this deep structural constraint to the nature of the global financial system restricting the ability of the central banks to pursue “independent” policy objectives.