ASYMMETRY IN INFLATION TARGETING

Year 2019, Volume: 41 Issue: 2, 391 - 412, 06.01.2020

Pınar Deniz , Erhan Aslanoğlu

https://doi.org/10.14780/muiibd.665062

Cited By: 2

Abstract

Following the world financial crisis beginning in the last quarter of 2008, aggregate demand and
commodity prices have declined sharply leading to a fast decline in world inflation. This different and
new period reflects the rise in risk appetite leading to high fluctuations in the short term capital flows.
World central banks revised their monetary policy to the changing conditions taking into account
financial stability. In 2002, the Central Bank of Republic of Turkey adopted inflation targeting (in the
implicit form) to maintain price stability. After 2008, parallel to the developments in global markets,
the Turkish economy reflects decline in inflation rates. Together with the changes in the economic
conditions, estimating monetary policy models in the form of constant-coefficient and symmetric
specification may lead to erroneous interpretations. This study analyzes the existence of structural
break(s) and asymmetric behavior for the 2003-2016 period. The paper also examines the monetary
policy model under the New Keynesian DSGE model. The Turkish monetary policy investigated for
the period presents October 2009 as the break point under different models and structural break tests.
Asymmetric reactions to interest rate, output and exchange rate are observed which are suggesting
changes in the monetary preferences of Central Bank of Republic of Turkey.

Keywords

Inflation Targeting, Structural Break, Asymmetry, New Keynesian DSGE Model

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