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THE IMPACT OF INFLATION TARGETING MONETARY POLICY ON MACROECONOMIC
PERFORMANCE OF TURKEY DURING 2002-2022
Berdiyorov Bekzod Shoymardonovich
Turin Polytechnic University in Tashkent
ORCID: 0009-0008-6021-3549
Masharipov Sarvar Matkarimovich
JSC “KDB Bank Uzbekistan”
ORCID: 0009-0008-3828-0032
Abstract.
The main aim of the study is to investigate the impact of inflation targeting (IT)
strategy in Turkey during 2002-2022, which was adopted in a three-year period of 2002-2004, on
macroeconomic performance (actual inflation, exchange and interest rates) and economic growth
of Turkey (in terms of the real GDP). The econometric and empirical investigation of this research
focusing on the impact of inflation targeting on the selected macroeconomic variables were
carried out by the linear squares method (LSM) regression taking the data of the period after
implementation of the monetary policy. At this, the independent variable of inflation targeting
was estimated against each chosen macroeconomic variable separately in four different models
to catch its linear impact on the changes of these variables over the period after implementation
of the strategy. The empirical outcomes demonstrated that inflation targeting monetary policy is
strong enough to impact the macroeconomic performance of Turkey in terms of reducing inflation
rates, boosting economy by pushing real GDP to grow, stabilize exchange rates and lower the
nominal interest rates on deposits.
Keywords:
inflation targeting (IT), macroeconomic performance, linear squares method.
2002-2022-YILLARDA TURKIYADA INFLYATSION TARGETLASH SIYOSATINING
MAKROIQTISODIY KO'RSATKICHLARGA TA'SIRI
Berdiyorov Bekzod Shoimardonovich
Toshkentdagi Turin Politexnika Universiteti
Masharipov Sarvar Matkarimovich
JSC “KDB Bank Uzbekistan”
Annotatsiya.
Tadqiqotning asosiy maqsadi Turkiyada 2002-2022-yillarda 2002-2022
yillarda uch yillik davrda qabul qilingan inflyatsiyani nishonlash (IT) strategiyasining
makroiqtisodiy ko‘rsatkichlarga (haqiqiy inflyatsiya, valyuta kursi va foizlar) ta’sirini
o‘rganishdan iborat. stavkalari) va Turkiyadagi iqtisodiy o'sish (real Y
aIM bo'yicha). Ushbu
tadqiqotning ekonometrik va empirik tekshiruvi inflyatsiyani nishonlashning tanlangan
makroiqtisodiy o'zgaruvchilarga ta'siriga qaratilgan bo'lib, pul-kredit siyosatidan keyingi davr
uchun ma'lumotlardan foydalangan holda chiziqli kvadrat usuli (LSM) regressiyasi yordamida
o'tkazildi.
UO
‘
K: 336.748.12
IX SON - SENTYABR, 2024
57-68
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Bunday holda, inflyatsiyani maqsadlilashtirishning mustaqil o'zgaruvchisi har bir
tanlangan makroiqtisodiy o'zgaruvchiga nisbatan, strategiya amalga oshirilgandan keyingi davr
mobaynida ushbu o'zgaruvchilarning o'zgarishiga chiziqli ta'sirini aniqlash uchun to'rt xil
modelda alohida baholandi. Empirik natijalar shuni ko'rsatdiki, pul-kredit siyosatini nishonga
olgan inflyatsiya inflyatsiya darajasini pasaytirish, real YaIM o'sishini rag'batlantirish orqali
iqtisodiyotni rag'batlantirish, valyuta kurslarini barqarorlashtirish va nominal depozit foiz
stavkalarini pasaytirish nuqtai nazaridan Turkiyaning makroiqtisodiy ko'rsatkichlariga ta'sir
ko'rsatish uchun etarlicha kuchli.
Kalit so'zlar:
inflyatsiyani maqsadlilashtirish (IT), makroiqtisodiy ko'rsatkichlar, chiziqli
kvadrat usuli.
ВЛИЯНИЕ ИНФЛЯЦИОННОГО ТАРГЕТИРОВАНИЯ ДЕНЕЖНО
-
КРЕДИТНОЙ
ПОЛИТИКИ НА МАКРОЭКОНОМИЧЕСКИЕ ПОКАЗАТЕЛИ ТУРЦИИ В 2002
-
2022 ГГ.
Бердиёров Бекзод Шоймардонович
Туринский политехнический университет в Ташкенте
Машарипов Сарвар Маткаримович
АО «КДБ Банк Узбекистан»
Аннотация.
Основной целью исследования является изучение влияния стратегии
инфляционного таргетирования (ИТ) в Турции в 2002
-
2022 гг., которая была принята в
трехлетний период
2002-
2004 гг., на макроэкономические показатели (фактическая
инфляция, обменный курс и процентные ставки) и экономический
рост Турции (с точки
зрения реального ВВП). Эконометрическое и эмпирическое исследование этого
исследования, сосредоточенного на влиянии таргетирования инфляции на выбранные
макроэкономические переменные, было проведено с помощью регрессии методом
линейных квадратов (LSM) с использованием данных за период после реализации
денежно
-
кредитной политики. При этом независимая переменная таргетирования
инфляции оценивалась по отношению к каждой выбранной макроэкономической
переменной отдельно в четырех различных моделях, чтобы уловить ее линейное влияние
на изменения этих переменных за период после реализации стратегии. Эмпирические
результаты показали, что денежно
-
кредитная политика таргетирования инфляции
достаточно сильна, чтобы повлиять на макроэкономические показатели Турции
с точки
зрения снижения темпов инфляции, стимулирования экономики путем стимулирования
роста реального ВВП, стабилизации обменных курсов и снижения номинальных
процентных ставок по депозитам.
Ключевые слова:
таргетирование инфляции (IT), макроэкономические
показатели,
метод линейных квадратов.
Introduction.
Turkey has been experiencing significant rate of inflation since 2022, peaking at 85.4% in
October 2022 and amounting to 75.5% as of the beginning of August 2024. Why the country is
suffering from high inflation, when its government has been implementing Inflation Targeting
(IT) policy since 2002. Has this policy ever been effective Turkey?
There have been strong debates among scholars on the true influence of IT on acquiring
economic development as well as stability. Many experts argue that targeting inflation is
beneficial only for the developed countries’ economies
while the strategy is assumed to give
negative results when implemented by emerging nations. According to Mankiw (2008), the
failure in enhancing economic situation through targeting inflation is related to the
unsuccessful fulfillment of the requirements and conditions prior to policy implementation. As
the author states, a country satisfying the 2 of the main prerequisites upon implementation of
monetary policy of inflation targeting, namely, independence level of monetary policymaker
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and non-existence of any exchange rate targeting or preference, is able to adopt inflation
targeting as its monetary policy tool. It should be noted that Mishkin (2008) defines inflation
targeting as “…an economi
c policy in which the Central Bank estimates and announces in public
a targeted inflation rate, and then attempts to steer the actual inflation towards the targeted
range through the use of interest rate changes and other monetary policy instruments.”
During the last two decades, many countries such as Turkey, Sweden, Canada, Germany,
Nigeria, Switzerland, New Zealand and Iran actively focused on targeting their levels of inflation
to facilitate economic growth (Eroglu et. al, 2017). Moreover, targeting inflation has mattered
Turkey in 2000s, when the country faced depression after failing to target the exchange rate.
After the failure of Turkey on targeting exchange rates, the Central Bank (CBT) eventually
implemented floating exchange rate. Following that government needed more successful
monetary policy to stabilize the economic situation in the country. The successful practice in
several countries made inflation targeting strategy a preferable choice for Turkey during the
next years. As a result, the Turkish government implemented the inflation targeting monetary
strat
egy “implicitly” starting from 2002 till 2004 as per the “Transition to a strong Economy”
program and is fairly consistent with this method up to present.
So how the inflation-targeting method influenced the macroeconomic performance of
Turkey? Since the monetary control possibly has a huge influence on economic indicators which
play a key role for an economy’s healthy progress, it is assumed that policymakers impact the
economy by targeting inflation through interest rates and money supply (Mishkin, 2010). There
have been opposite arguments as well as conflicts among economists, politicians, various labor
organizations and professionals about the positive or negative influence of objecting inflation
on development of economy of Turkey. The finance minister of Turkey, for instance, made
arguments in 2005 about the position in maintaining their own policies in order to target high
inflation rate that obviously play essential role in encouraging economic development as well
as stabilizing market prices. Meanwhile, the experts from labor organizations in Turkey
demonstrates opposite position that the effect of inflation targeting on monetary stability can
be exaggerated if economic development as well as improvement is achieved primarily due to
the implementatio
n of this strategy (Eroğlu et al., 2017).
The main aim of the study is to investigate the impact of inflation targeting (IT) strategy,
which was adopted in a three-year period of 2002-2004, on macroeconomic performance
(actual inflation, exchange and interest rates) and economic growth of Turkey (in terms of real
GDP).
Literature review.
The previous researches on the topic define the term of inflation targeting in various
ways. Nonetheless, the most comply with the approach of Mishkin (2000) that the inflation
targeting (IT) strategy is “
a monetary policy strategy in which a medium-term numerical target
is set for inflation, the primary goal of monetary policy is to assure price stability and no other
monetary target is pursued, and the transparency and accountability of the central bank is
attained
”.
Inflation targeting in economics defined as a target of maintenance of low inflation rates
and thus used to get stabilize pricing policy. According to Gul et. al (2006), so as to practice the
inflation targeting, the developing countries are recommended to hold approximately 15
percent of inflation rate, as in the example of Turkey. Yet, Sanli (2006) argues that majority of
the countries that wish to implement inflation targeting begin the strategy with around 25
percent inflation rate. He states that between 2002 and 2004, Turkey managed to success low
inflation rate. In 2002, the country’s inflation
- consumer price index - was 29.7 percent and
was steadily decreased by implementing the monetary tool of inflation targeting. Inflation rate
was reduced to 18.4 in 2003 and 9.3 percent in 2004 and finally to 7.7 percent in 2005 (ibid.).
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From 2005, although the inflation rate experienced some increases, Turkey managed to
maintain the stable inflation rates (Eroğ
lu et. al, 2017).
The impact of inflation targeting in macroeconomic indicators
Since it was obvious that inflation targeting strategy enables to improve the country’s
macroeconomic performance, it was regarded by some researches as one of the best monetary
policy strategies in both developing and developed countries (Portugal, 2007). Currently, the
empirical studies that have been done on the inflation targeting are not numerous enough as
it
is fairly new strategy
for most countries to adopt. However, there are several studies which
support that inflation targeting leads to better macroeconomic performances. According to
Petursson (2014), for instance, the interest rates could be reduced and the currency stability
was observed when this strategy had been adopted.
Empirical studies including Neuman and Hagen (2012), Hu (2013), Wu (2014) and IMF
(2015) suggest that macroeconomic performance of the country can be positively affected if
inflation targeting is practiced. However, Ehrmann and Cecchetti (2006) and Ball (2008) argue
their findings did not show economic boost when inflation had been targeted. Yet, overall, the
studies found that when countries adopted inflation targeting, the macro-performance was
improved.
Controversially, the studies by many experts such as Debelle (2009) on the case of
Australia, inflation practicing country, as well as several nations that did not apply IT method,
Corbo and Herbel (2008) who studied Latin American countries, Dickman (2011) supporting
the Debelle (2009)’s finding on Australia, Freedman (2011) researching Canada, Brash (2012)
studying New Zeeland, Schmidt- Hebbel and Werner (2012) studied Brazil, Mexico and Chile,
supported the idea that inflation rate can indeed be reduced by following inflation targeting
strategy. What is more, the economic growth has been detected in these countries, yet the
growth rates were rather low. It can therefore be concluded that inflation targeting was
ultimately considered as a reliable strategy for the monetary policy makers who implemented
it.
King (2009) examined inflation targeting effects on 12 industrialized countries and found
that without the reduction of production it is possible to decrease the inflation rate.
Nevertheless, Studies by Jones and Mishkin (2008) who did research on the case of Poland,
Czech Republic and Hungary claim that it is a bit early to consider that inflation targeting always
brings success to economies. Moreover, the authors suggested that in transition economies
when the inflation is targeted, significant inflation variabilities over time can be witnessed. In
the study of Fraga et. al (2008), the outcomes showed that IT monetary policy had been highly
significant tool of stabilizing economy of emerging markets. However, another research by
Karaca (2016) taking the example of more than hundred developing economies depicted, IT
strategy lead to rather weak changes in actual inflation rates and did not hold influence on other
macro-indicators.
Kara and Orak (2018) examined the average inflation rate expectations during 2002-2004
period of inflation targeting implementation in Turkish economy. According to the results, the
inflation rates in these three years were in a decline and in line with the targeted corridors,
despite the pre-adoption inflation rates had been quite high at average of 73%.
According to the study by Akyazi and Ekinchi (2018), IT strategy had been effective in
Turkey and other developing countries who adopted it. The actual inflation rates and economic
growth were positively influenced by inflation targeting. The scholars suggest that Turkish
economy could acquire significant results on addressing high inflation rates and achieve higher
GDP growth due to IT strategy, in comparison with pre-implementation periods.
Besides, Isik and Duman (2018) mentioned the exchange rate system of the Turkish
financial market as one of the advantages and prerequisites of IT adoption. According to the
scholars, the pre-implemented regime of floating exchange rates in Turkey assisted to lower
the control of CBT (Central Bank of Turkey) on exchange rates, which in turn, increased the
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impact of inflation targeting policy. At this, with the single monetary policy of inflation
targeting, CBT increased its trustworthiness and the economy acquired lower inflation rates
and growth.
Furthermore, it is suggested that even during the global financial recession of 2008,
Turkish government could implement more robust policies to tackle and minimize financial
and economic harm of crisis (Eruglu et. al, 2017). At this, the economic situation of Turkey on
inflation targeting process was key to these policies.
Methodology.
The main aim of the paper is the analysis of the impact of the inflation targeting (IT) policy
on economy of Turkey. In econometric terms, the research tests the consistence of our
hypothesis that the above impact is positive enough to enhance overall macroeconomic
performance of the country during the years of application. At this, the alternative hypothesis
and the relative null hypothesis consist of the following:
H
0
: The economic development of Turkey was not influenced considerably by the
framework of the monetary policy of targeting inflation.
H
1
: The economic development of Turkey was influenced considerably by the framework
of the monetary policy of targeting inflation.
In other words, the research aims to define, analyze and explain the influence of IT on
macro-performance and development in Turkey. In this regard, quantitative estimation is
implemented.
The method of research, which is based on analyzing empirical results and figures in
broad comparison, will show the influence of IT strategy realization on actual rates of inflation,
exchange, interest rates as well as changes real GDP over the periods. In this regard, data
containing 17 years was gathered from the websites of leading databases of the world, such as
the World Development Indicators.
Model and Dataset.
Within this study, apart from the proxy for the inflation targeting, 4 common indicators
of macroeconomic performance, namely, deposit interest, inflation, exchange rates and real
GDP of Turkey, were utilized. The estimation of results on these variables were carried out with
the help of Least Squares Method (LSM) taking the data of the period after implementation of
the monetary policy.
According to Ball (2003) and Fraga et. al (2003), this approach was previously utilized in
the analyses of performances. In previous studies, descriptive explanatory estimations were
utilized to investigate the effect of inflation targeting, however, in this research, least squares
method is being utilized. For example, scholars such as Mishkin and Jones (2003), Hu (2003),
Fraga et al. (2008), Akyazi and Ekinci (2018) and Isik and Duman (2018) utilized more
descriptive estimating method with scatter plots, standard deviations, means and etc. The LSM
method has its pros if compared to other alternatives. The main advantage is that least squares
estimation is defined as the Best Linear Unbiased Estimation (BLUE), which easily describes
points.
Table 1.
Data description:
Abb
Variable
Definition
Exp. sign
TIR
Target Inflation Targeted inflation rates by Central Bank of Turkey, in %
N/A
AIR
Inflation rate
Annual inflation rates in terms of change in CPI, in %
-
EXCH
Exchange rate
Change in purchasing power of Lira against USD, in %
-
INT
Interest rate
The deposit interest rate of one year maturity, in %
-
GDP
Real GDP
Real Gross domestic product of Turkey in USD, in log
+
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The main conclusion can be derived from previous studies that the adoption of this
strategy results in a decrease in inflation rates and their volatility, which means that the
projected correlation between TIR and AIR is negative. Besides, most inflation targeted
countries experienced economic growths in different pace, thus, the targeted inflation rates are
positively related with real GDP. Another attribute of the inflation targeting, as was stated by
the scholars, when implemented, this strategy helps to stabilize exchange rates and decrease
interest rates. This leads us to an assumption that interest and exchange rates are negatively
correlated to IT.
To carry out our investigation, the data from World Development Indicators database was
acquired. The study takes the period of 21 years (2002-2022) after the implementation. The
data contains the following macroeconomic indicators of Turkey.
So, was the implemented monetary policy by the Turkish government in 2002-2004
successful? If so, how the strategy changed the variables that are being regressed. To expose
the impact in details, following model was established:
Model:
The below equation was established to examine the relationship between
inflation targeting strategy and the actual outcomes in given indicators of Turkey. At this, the
model is subjected to be separately used for each chosen macroeconomic indicator.
Y
t
=
β
0
+
β
1
*TIR
t
+
β
2
*t
t
+ u
t
(1)
At this, each of the chosen indicator is defined by Y
t
to individually check for their relation
to targeted inflation rates, which are defined as TIR
t
. Here, time variable is also included as t
t
while the constant value is set as
β
0
by default. u
t
is for residuals and
β
1
and
β
2
are coefficients
of TIR
t
and time trend, respectively. In this sense,
β
1
represents the impact of targeted inflation
rates on each variable that, in turn, makes it the research’s main coefficient.
Empirical results.
Before carrying out econometric regressions over the variables of the model, several tests
on the consistency and validity of the gathered data should be implemented.
Unit Root Tests:
When dealing with time-series data, the inputs should be first checked
for stationarity before implementing any regressions, as stated by Tari (2005). Data that is not
stationary can provide incorrect or deceptive results to researchers, apart from causing some
problems in estimations. As the scholar claims, the non-stationarity of the two variables in LSM
can cause the derived R-squared to be abnormally high. In this sense, the researchers can get
confused when setting conclusion on the correlation and significance of the models, referring
to incorrect R-squared. Regarding to Enders (2005), such situation is called spurious estimation
which is the result of similar direction of time-series trends.
Stationarity of the variables is
“… a stochastic process i
s said to be stationary if its mean
and variance are constant over time and the value of the covariance between the two time periods
depends only on the distance or gap or lag between the two time periods and not the actual time
at which the covariance is computed
” as stated by Gujarati (2003).
As per the above definition, there are following assumptions for Y
t
:
Y
t
with the above features is called weak stochastic but still stationary - sufficient for use.
Many methods of identifying stationarity of variables exist but the most famous way is the
Unit Root test. The main assumption in this test is that the variables of time-series should have
no unit root in order to be considered as stationary, otherwise, the variables are subjected to
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the non-stationarity problem. In this research, I used the common unit root test called
Augmented Dickey-Fuller (ADF) test. The general equation of this test is as following:
At this, the variable’s first
difference testable for stochastic stationarity is defined by
Δ
Yt,
where t is the time trend. Besides, the term of delay difference is presented by
Δ
Yt-1, which is
used in the regression to escape the problem of autocorrelation in residuals. According to
Karaca (2005), the equation must not have any kinds of autocorrelation problem in order for
ADF test to give correct results. Moreover, k is the number of lags taken for variables, which is
identified by the SIC (Schwarz Information Criterion) or AIC (Akaike Information Criterion).
The stochastic residuals are given as
ɛ
t
.
Table 2.
Augmented Dickey-Fuller unit root test outcomes:
Variable
ADF
Lag
T,S
Targeted inflation rates (TIR)
-3.267 (-3.750*)
1
T+S
Actual inflation rates (AIR)
-4.068*
0
T+S
Exchange rates (EXCH)
-4.111*
1
T+S
Interest rates (INT)
-5.927*
0
T+S
Real GDP (ln_GDP)
-3.776*
1
S
*the variable is stationary at 1% level of significance
The ADF test examines whether the Y
t-1
parameter of
δ
is zero. If so, the variables are
assumed to be non-stationary due to existence of unit root. Otherwise, the variables are
stationary without any unit root. This case is defined as
δ
≠ 0, δ
< 0.
Upon the application of the ADF test in this research, it is better to clarify the structure of
equation first. 9 lags are set to be the maximum length of lags applied in this test as per the SIC
(Schwarz Information Criterion).
The above table demonstrates that only targeted inflation rates (TIR) variable contains
unit root and is non-stationary. However, after first difference of TIR, unit root was avoided and
stationarity was acquired.
Analysis of results.
According to Serper (2000), there are many assumptions that serve as a base for linear
estimation. One of them is the normal distribution of residuals, which means the zero mean of
residuals. The others imply the absence of autocorrelation and heteroskedasticity problems
within the error terms.
The normal distribution of variables or residuals can be defined
as the variables’ visual
appearance in symmetric hill-shaped curve. The zero mean is defined as the situation when the
sum of the all the residuals of the variable is zero (ibid.).
If the issue of residuals’ non
-normal distribution exists, the problems can still be solved
by the assumption of Central Limit Theorem (CLT), as stated by Cil (2004). The theorem defines
that the normal distribution of residuals can be achieved if the size of sample (number of
observations) is increased.
It is also not desired for the variables to have the problems of heteroscedasticity and
autocorrelation. These problems can be found, if exists, by several tests. According to Alkan and
Nargelecekenler (2008), the above-stated problems can be addressed by the Newey-West
Heteroskedasticity and Autocorrelation (HAC) test.
After utilization of linear regressions, the below results on the effect of IT (inflation
targeting) strategy on the chosen indicators, namely, actual inflation, interest, exchange rates
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64
and real GDP of Turkey were acquired. For the purpose of eliminating the potential problems
of autocorrelation and heteroscedasticity, log forms of variables were generated and applied
within regression estimations, as was suggested by Tari (2005).
Table 3.
Results of separate linear regressions:
VARIABLES
MODEL 1
Log (Inf. rate)
MODEL 2
Log (Real GDP)
MODEL 3
Log (Exch. rate)
MODEL 4
Log (Int. rate)
D1 Inf. target.
-0.0711464
0.0423214
-0.041058
-0.0364417
(-3.40)***
(4.16)***
(-3.69)***
(-2.64)***
Time trend
0.0464888
0.0306795
0.0981597
-0.0147916
(2.48)***
(3.36)***
(9.85)***
(-1.20)
Constant
1.656114
27.05234
-0.3664161
3.012189
(7.66)***
(257.23)***
(-3.19)***
(21.14)***
Observations
16
16
16
16
R-squared
0.4733
0.8609
0.8938
0.6237
Adjusted R-sq.
0.3923
0.8395
0.8775
0.5659
F-test
0.0155
0.0000
0.0000
0.0017
t statistics values in parentheses: *** p<0.01, ** p<0.05, * p<0.1
Model #1 (Actual Inflation rates)
As per the Model 1 regression outcomes (
table 3
), the coefficient of differenced targeted
inflation (tirD1) variable was -0.0711464, which is negative as was projected. The variable is
significant at 1%. It means that the inflation targeting strategy decreases the inflation rates.
Time trend (t) had a positive coefficient of 0.0464888 and statistically significant at the
level of 1% while the adjusted R-squared equaled 0.3923 that suggests more than 39% of the
fluctuations in the actual inflation rates can be explained by this model and the other 61% is
related to non-included factors and indicators. Moreover, F-test shows us that the model itself
is at 1% level of significance. The above values demonstrate that the monetary policy under this
research is effective to decrease inflation rates, yet not highly effective.
Model #2 (Real GDP)
The Model 2 regression outcomes show that the coefficient of differenced targeted
inflation (tirD1) variable was 0.0423214, which is positive as was projected in advance. The
variable is significant at 1%. It means that the inflation targeting strategy boosts the economy
and leads to a growing real GDP of Turkey.
Time trend (t) had a positive coefficient of 0.0306795 and statistically significant at the
level of 1% while the adjusted R-squared equaled 0.8395 that suggests almost 84% of the
changes in real output of Turkey can be represented by this model and the remaining 16% is
related to non-included factors and indicators. Moreover, F-test shows us that the model itself
is at 1% level of significance. The above values demonstrate that the inflation targeting
monetary policy is strongly effective to increase real output of Turkey.
Model #3 (Exchange rates)
As per the Model 3 regression outcomes, the coefficient of differenced targeted inflation
(tirD1) variable was -0.041058, which is negative as was projected. The variable is significant
at 1%. It means that the inflation targeting strategy decreases the exchange rates. Time trend
(t) had a positive coefficient of 0.0464888 and statistically significant at the level of 1% while
the adjusted R-squared equaled 0.8775 that suggests about 88% of the fluctuations in the
exchange rates can be explained by this model and the other 12% is related to non-included
factors and indicators. Moreover, F-test shows us that the model itself is at 1% level of
significance. The above values demonstrate that the monetary policy under this research is
effective to decrease inflation rates and highly correlated.
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65
Model #4 (Interest rates)
The Model 4 regression outcomes show that the coefficient of differenced targeted
inflation (tirD1) variable was -0.0364417, which is negative as was expected beforehand. The
variable is significant at 1%. It means that the inflation targeting strategy will lead to a decrease
in the deposit rates.
Time trend (t) had a positive coefficient of -0.0147916 and statistically significant at the
level of 1% while the adjusted R-squared equaled 0.5659 that suggests almost 57% of the
changes in real output of Turkey can be represented by this model and the remaining 43% is
related to other factors. Moreover, F-test shows us that the model itself is at 1% level of
significance. The above outcomes suggest that the inflation targeting strategy has fairly strong
effect in the nominal interest rates on deposits.
Table 4.
Results of de-
trended variables’ linear regressions:
VARIABLES
MODEL 1
Log (Inf. rate)
MODEL 2
Log (Real GDP)
MODEL 3
Log (Exch. rate)
MODEL 4
Log (Int. rate)
D1 Inf. target.
-0.0711464
0.0423214
-0.041058
-0.0364417
(-3.40)***
(4.16)***
(-3.69)***
(-2.64)***
Constant
-.0590127
.0292828
-.01955
-.0331447
(-0.85)
(0.86)
(-0.56)
(-0.74)
Observations
16
16
16
16
R-squared
0.4235
0.5216
0.4924
0.3178
Adjusted R-sq.
0.3823
0.4875
0.4561
0.2690
F-test
0.0063
0.0016
0.0024
0.0230
t statistics values in parentheses: *** p<0.01, ** p<0.05, * p<0.1
However, by including the time trend (t) into the regressions, inflated high R-squares
were obtained. In order to get the reasonable outcomes, the variables were de-trended and
input to the regressions again. The results, including the t-statistics, coefficients and p-values
were the same as the regressions with the time trend, while only R-squared values were less
and reasonable (
table 4
).
Comparison the periods of pre and post adoption
The above econometric analysis gave us the results on how much the inflation targeting
impacted the macroeconomic performance of Turkey after adoption. However, comparing the
results of pre and post adoption period figures shows us the real enhancement in the economy
of the country. Below, the findings of Eruglu et. al (2017) on the statistics of chosen
macroeconomic variables are given separately for pre and post years of strategy
implementation. The author used gathered data of 1990-2002 for the pre-inflation targeting
period and for post-adoption of 2002-2007, in order to avoid the global crisis effects on the
coun
try’s economic situation.
Figure 5.
The basic comparison of variables during pre and post-adoption periods of IT:
№
Variables
Pre-adoption of 1990-2002 Post-adoption of 2002-2007
Mean
Std.dev.
Mean
Std.dev.
1
Actual inflation
73.7%
17.9%
17.7%
15.3%
2
Rate of GDP growth
3.6%
5.5%
6.8%
1.7%
3
Deposit interest rates
65.1%
28.8%
28.7%
11.4%
4
Exchange rate change
4.7%
6.1%
-0.1%
3.6%
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66
As the preliminary comparison of the inflation, exchange, interest rates and GDP growth
rate figures during pre and post implementation, Eruglu et. al (2017) uses the values such as
mean and standard deviation to show the impact of inflation targeting on the above stated
macroeconomic variables. At this, the mean values associate the arithmetic mean of the above
indicators while the standard deviations show their volatility over the periods of time.
According to the table above, after adoption of inflation targeting strategy, inflation rates
in Turkey on average decreased to 17.7% from 73.7% while the decline in nominal deposit
interest rates constituted about 36% from 65% to 28.7%. The influence of inflation targeting
on growth rate was also significant. The growth rates on average went up from 3.6% in pre-
adoption years to 6.8% in post-adoption years. Moreover, the excha
nge rates’ mean value of
annual change during 1990-2002 was 4.7%, which decreased to average of -0.1% during 2002-
2007.
The changes in the standard deviations of the indicators demonstrates the decline in their
volatility after implementation of inflation targeting. For example, the volatility of inflation
rates went down to 15,3% from 17,9% and the volatility of GDP growth declined from 5,5% to
1,7% after the usage of the strategy. So, the above results refer to the idea that IT monetary
policy is proven to be strong enough to impact the macro-performance of Turkey in terms of
reducing inflation rates, boosting economy by pushing real GDP to grow, stabilize exchange
rates (even decrease to a negative value) and lower the nominal interest rates on deposits.
Indeed, the comparison of the results during pre and post IT implementation shows clear
picture on the extend of the strategy’s impact on Turkey’s economy during the given years.
According to Sanli (2006), between 2002 and 2004, Turkey managed to success low inflation
rate. In 2002, the country’s inflation
- consumer price index - was 29.7 percent and was steadily
decreased by implementing the monetary tool of inflation targeting. Inflation rate was reduced
to 18.4 in 2003 and 9.3 percent in 2004 and finally to 7.7 percent in 2005 (ibid.). From 2005,
although the inflation rate experienced some increases, Turkey managed to maintain the stable
inflation rates (Eroglu et. al, 2017).
Conclusion.
There have been numerous researches on the effects of inflation targeting monetary
policy on the economic growth and macroeconomic performance of many countries recently.
The main conclusion can be derived from these studies that the adoption of this strategy leads
to a decrease in inflation rates and their volatility. Besides, most inflation targeted countries
experienced economic growths in different pace. Another attribute of the IT was that when
implemented, this policy helps to stabilize exchange rates and decrease interest rates.
Since it was obvious that inflati
on targeting strategy enables to improve the country’s
macroeconomic performance, it was regarded by some researches as one of the best monetary
policy strategies in both developing and developed countries (Portugal, 2007). Currently, the
empirical studies that have been done on the inflation targeting are not numerous enough as
it
is fairly new strategy
for most countries to adopt. However, there are several studies which
support that inflation targeting leads to better macroeconomic performances. According to
Petursson (2014), for instance, the interest rates could be reduced and the currency stability
was observed when this strategy had been adopted.
My research examined the impact of inflation targeting strategy, adopted in 2002-2004,
on macroeconomic performance (actual inflation, exchange and interest rates) and economic
growth of Turkey (in terms of the Real Gross Domestic Product) during 17 years from 2002 to
2018. The econometric and empirical investigation of this research focusing on the impact of
inflation targeting on the selected macroeconomic variables were carried out by the linear
squares method (LSM) regression. At this, the independent variable of IT was estimated against
each chosen macro-variable separately in four different models to catch its linear impact on the
changes of these variables over the period after implementation of the policy.
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67
So how the inflation-targeting method influenced the macroeconomic performance of
Turkey? Was the inflation targeting monetary policy adopted in early 2000s by Turkey
successful to address the economic depression? The empirical outcomes of this research show
that the strategy was strongly efficient in the performance of the chosen macroeconomic
variables. Although the coefficients of targeted inflation rate variable (TIR) and time trend (t)
were rather low, the regressions results gave us the expected coefficient signs of correlation.
Besides, both the above regressors were statistically significant at 1% level of significance.
Moreover, the all the four models of regressions were statistically significant, as per the
respective F-test values, with adjusted R-squares of ranging from 0,3923 to 0,8775.
The results are in close to the conclusions made by Kara and Orak (2018) that examined
the average inflation rate expectations during 2002-2004 period of inflation targeting
implementation in Turkish economy. According to the scholars, the inflation rates in these three
years were in a decline and in line with the targeted corridors, despite the pre-adoption
inflation rates had been quite high at average of 73%. Besides, the study by Akyazi and Ekinchi
(2018) also suggested that IT strategy had been effective in Turkey and other developing
countries who adopted it. The actual inflation rates and GDP growth were positively influenced
by inflation targeting. The Turkish economy acquired significant results on addressing high
inflation rates and achieve higher GDP growth due to IT strategy, in comparison with pre-
implementation periods (ibid.).
Besides, Isik and Duman (2018) mentioned the exchange rate system of the Turkish
financial market as one of the advantages and prerequisites of IT adoption. According to the
scholars, the pre-implemented regime of floating exchange rates in Turkey assisted to lower
the control of CBT (Central Bank of Turkey) on exchange rates, which in turn, increased the
impact of inflation targeting policy. At this, with the single monetary policy of inflation
targeting, Central Bank of the country increased its trustworthiness and the economy acquired
lower inflation rates and higher growth. Furthermore, it is suggested that even during the
global financial recession of 2008, Turkish government could implement more robust policies
to tackle and minimize financial and economic harm of crisis (Eruglu et. al, 2017). At this, the
economic situation of Turkey on inflation targeting process was key to these policies.
In this sense, it can be concluded that inflation targeting monetary policy is proved to be
strong enough to impact the macroeconomic performance of Turkey in terms of reducing
inflation rates, boosting economy by pushing real GDP to grow, stabilize exchange rates and
lower the nominal interest rates on deposits. The empirical results may show even stronger
correlation if the research is carried out again in the future with more variables employed and
more years are considered.
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