The monetary policy change in Turkey in 2009 and its implications for inflation and growth

Abstract

In 2009, the Central Bank of the Republic of Turkey switched from a strict rule-based inflation targeting policy to a discretionary policy aiming for financial stability and growth. This paper investigates the consequences of this policy shift for monetary transmission, inflation rate and economic growth using the Synthetic Control Method. More specifically, the paper presents a counterfactual estimation of the inflation rate and the economic growth in Turkey after 2009. The estimation results suggest that the growth rate would have been similar afterwards, but the inflation rate would have been on average three percentage points lower had the CBRT stuck to the inflation targeting policy. This finding lends support to the argument that for developing countries inflation targeting works as a transparency and credibility tool and improves economic outcomes.