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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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Determinants of Interest Rates

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Decomposing the Determinants of Interest Rates under Inflation Targeting

Abstract: This chapter investigates the monetary policy rule of the Central Bank of the Republic of Turkey under a structural VAR (vector autoregression) model, structurally decomposes the variations of the determinants of the monetary policy, and compares the findings with a set of inflation-targeting emerging market economies. Structural VAR methodology is used for time series analysis for Turkey whereas GMM (generalized method of moments) based panel VAR is employed for the panel of eight emerging countries. Empirical findings suggest the dominance of inflation rate in the long-term model whereas inflation rate loses its priority in the short-term model for Turkey. A group of emerging countries are observed to keep inflation as priority in the short-term model contrary to the findings for Turkey.

Keywords: inflation targeting, emerging market economies, structural VAR, variance decomposition

Jel: C32, E52, E58

1 Introduction

One of the main challenges inside macroeconomic topics is that governments often contradict with central banks since the objective of most central banks worldwide is to maintain price stability whereas it is mainly achieving high-growth rate and low-unemployment levels for the government. The disharmony between fiscal and monetary policy is so crucial that there have been several theories available. High public expenditure is justified and even advised during stagnant periods which takes place under a school of thought referred as Keynesian policies. On the other hand, it is criticized when the...

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