Exchange rate and inflation under weak monetary policy: Turkey verifies theory
- For the academic audience, this paper presents the outcome of a well-identified, large change in the monetary policy rule from the lens of a standard New Keynesian model and asks whether the model properly captures the effects. For policymakers, it presents a cautionary tale of the dismal effects of ignoring basic macroeconomics. The Turkish monetary policy experiment of the past decade, stemming from a belief of the government that higher interest rates cause higher inflation, provides an unfortunately clean exogenous variance in the policy rule. The mandate to keep rates low, and the frequent policymaker turnover orchestrated by the government to enforce this, led to the Taylor principle not being satisfied and eventually a negative coeffcient on inflation in the policy rule. In such an environment, was the exchange rate still a random walk? Was inflation anchored? Does the “standard model”” suffice to explain the broad contours of macroeconomic outcomes in an emerging economy with large identifying variance in the policy rule? There are no surprises for students of open-economy macroeconomics; the answers are no, no, and yes.
Author: | Refet S. GürkaynakORCiDGND, Burçin KısacıkoğluORCiDGND, Sang Seok LeeORCiDGND |
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URN: | urn:nbn:de:hebis:30:3-634229 |
URL: | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4110158 |
DOI: | https://doi.org/10.2139/ssrn.4110158 |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 679 |
Series (Serial Number): | CFS working paper series (679) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2022 |
Year of first Publication: | 2022 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2022/05/17 |
Issue: | This Draft: April 20, 2022 |
Page Number: | 42 |
Note: | Gürkaynak's research was supported by funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation program (grant agreement No 726400). |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |