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Current Issues in Turkish Economics

Problems and Policy Suggestions

Edited By Çağlar Yurtseven and Mahmut Tekce

The book covers a wide range of issues in Turkish economy and aims to discuss the problems, challenges and potential of Turkey in various sectors. The topics covered in the book include areas related to macroeconomics and monetary economics (inflation expectations, determinants and conduct of monetary policy), labor economics (earning differences, overeducation in labor markets), health economics (adult obesity), tourism economics (tourism response to disruptive events) and energy economics (solar energy systems). The book is written in a format so that general readers who are interested in the Turkish economy can easily read and have a deep understanding of the current economic issues in Turkey. In addition, the book is suitable for usage in the related courses as a textbook at the undergrauate and masters level in the fields of economics and business.

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Taylor Rule for Turkey under Multiple Structural Breaks

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Estimating the Forward-Looking Taylor Rule for Turkey under Multiple Structural Breaks

Abstract: We estimate a forward-looking Taylor rule for Turkey covering both implicit and explicit inflation-targeting periods. In this analysis, we also consider the presence of structural breaks in the policy coefficients. Even though the Turkish economy has been undergoing several structural changes since 2002, the previous studies that estimate the monetary policy rule for Turkey disregard structural breaks, while fitting a policy reaction function. In this study, we examine a Taylor rule for Turkey using a two-stage least square regression that is coupled with the analysis of multiple structural breaks with unknown dates. By using this methodology, we show that the monetary policy function of the Central Bank of the Republic of Turkey exhibits four different periods. This result demonstrates that it is crucial to take account of structural breaks, while estimating monetary policy rules.

Keywords: Taylor rule, monetary policy, structural breaks

JEL: E43, E58, E52

1 Introduction

During the 90s, Turkey suffered from high inflation and frequent economic crises due to a weak banking system, systematic high budget deficits and a central bank under political control. At the end of 1999, Turkey adopted an IMF-backed stabilization program with a crawling peg exchange rate regime to re-balance its macroeconomic indicators. However, the crawling peg exchange rate regime collapsed due to the considerable decline in foreign exchange reserves of the Central Bank of the Republic of Turkey (CBRT)...

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