Anda di halaman 1dari 36

UNIVERSITY OF CUKUROVA

FACULTY OF ECONOMICS AND ADMINISTRATIVE SCIENCES

ECONOMICS DEPARTMENT

INFLATION RATE TARGETING STRATEGY IN TURKEY BETWEEN


THE YEARS 2000-2015

ZGE KAMANLI

2013192021

ASSIST PROF. ERHAN CAN

GRADUATION PROJECT

ADANA/2017
ABSTRACT
Including Turkey, with the failure to achieve monetary stability using various
strategies such as interest, exchange rate and monetary targeting globally started a
new search for an effective policy to overcome high inflation rates. In the year
1990 a revolution started in New zealand where the infation targeting strategy was
used for the first time. As for Turkey being a country with the history of many
severe economic criseses and high inlation rates, by the end of the 90s the central
bank started to put the strategy as an aid and saviour to the table. The preperations
began in the year 2001 thus by the year 2003 implicit inflation rate targeting was
put into work and finally after conditions were met the central bank finally started
implying the targeting strategy fully by the year 2006. This paper aims to put a
light over the topic inflation rate targeting and what were the conditions in Turkey
that made it so crucial to pass on to a new policy. In the next part we will examine
if this policy achieved what it was aiming and if it has affected the country in a
positve or negative way with the help of tables and graphical data.
CONTENTS

GRAFICS LIST .................................................................................................................... vi

ACKNOWLADGEMENTS ................................................................................................ vii

INTRODUCTION ................................................................................................................. 1

PART ONE

INFLATION

1.1. What is Inflation ............................................................................................................. 2

1.2. How to measure inflation: Price Index ........................................................................... 3

1.2.1. Measuring price index ......................................................................................... 3

1.3 Reasons of inflation ......................................................................................................... 4

1.4 How to struggle with inflation ......................................................................................... 5

1.5 What is the inflation targeting strategy ............................................................................ 5

1.5.1.What is Inflation ................................................................................................... 2

1.5.2.. How to measure inflation: Price Index ............................................................... 3

PART TWO

INFLATON TARGETING STRATEGY IN TURKEY

2.1 Inflation in Turkey between 1940-1990 .......................................................................... 3

2.1.1 Inflation in Turkey between 1990-2001 ................................................................ 4

2.2 Turkey switching to the inflation targeting strategy ........................................................ 5

2.2.1. Implicit inflation targeting regime in Turkey (2002-2006) .................................. 5

2.2.2 The open inflation targeting regime period (2006-) ...................................... 2

2.2.3 The main frame of the Turkish inflation targeting regime. ................................... 3
PART THREE

EVALUATION OF THE REGME

3.1 The evaluation of the inflation targeting regime in Turkey ............................................. 4

CONCLUSION ...................................................................................................................... 5

SOURCES ............................................................................................................................. 5
GRAPHIC LIST

Graphic 1 - Inflation rate of New Zealand at the date of adoption and after

Graphic 2 - Turkish yearly inflation rate (1956-2012)

Graphic 3 - Turkish inflation rate (1970-2010)

Graphic 4 - The yearly CPI rates (%) in Turkey (2002-2005)

Graphic 5 - The dolarization level at a percentage rate

Graphic 6 - The financial soundness index

Graphic 7 - Inflation expectation and targets (2002-2005)

Graphic 8 - The Turkish inflation targeting performance

TABLE LIST

Table 1 - The adoption of the inflation rate targeting strategy of various countries
(comparasion)

Table 2 Central administration budget balance and debt stock (ratio to GDP)

Table 3 The Turkish inflation performance


ACKNOWLADGEMENTS

I would like to thank deeply my 4 year teacher Assist. Prof. Erhan CAN
who guided and supported the writting of this thesis and also my dear father
Serhat ASLAN who has always been my motivator throughout my education.

TEEKKRLER

Bu tezin yazlmasnda yardmn ve desteini esirgemeyen Assist. Prof.


Erhan CAN ve eitim hayatm boyunca motivasyonumu daima yksek tutan
babam Serhat ASLANa yrekten teekkr bor bilirim.
INTRODUCTION

In the long run the main goal of central banks are to achieve price stability in the
economy and continue this stability by using certain key strategies. Central banks
usually choose a certain period to apply these strategies. In order to choose an
efficient strategy the main variables in the economy are put into account. These
variables are used as intermediate goal to achieve price stability. Until today
interest rates, monetary base and exchange rates have been used as variables in
intermediate goals but the changing and tough economic conditions that took part
after the 1970 where the collapsation of the Bretton Woods took place, it started
to be hard for the central bank to use these variables. After the 70s a fever of high
inflation took over globally so economists and central bank came to a conclusion
that the most important side of monetary policy should be price stability. With the
failure of using interest rates, monetary base and exchange rate as a target many
countries started to search for a new policy for fighting inflation. The first applier
of inflation targeting was New Zealand in the year 1990 and with the succesfull
result many other countries started looking warm to the policy and slowly started
to shift as a main monetary policy thus Turkey also started using it since 2006.

The Turkish economy, since the founding of the republic faced many economic
crises and had to deal with many economic problems. At the begenning of 2000s
the November 2000 and February 2000 crisis that came one after another caused
deep effects and thus made it clear that immediate policy actions must be taken.
After the 2001 crises new precautions and decisions were taken. In 2001 the
consumer price index (CPI) hit the rate of %68,5 and in a similar way the
increasing rate of the producer price index (PPI) was %88,6. With the movement
to the transition to the strong economy program (gl ekonomiye gei
program) a tight monetary policy started be used which lowered the fever of
inflation. Following the year 2001 inlation targeting program was put into place
by the Turkish Central Bank and between the years 2002-2006 it was
implemented imlicitly and starting from 2006 we passed on to an open inflation
targeting strategy.
PART ONE

INFLATION

1.1 WHAT IS INFLATION?

The constant increase in the overall level of prices and due to this increase the loss
in the value of domestic money is accepted as inflation. (Frisch, 1989:1) In other
words it can be said that inflation is the aggregate demand being more than
aggregate supply or the real money income at the current price level. It can also be
defind as trying to continoue a income level or spending level that is unnatainable.
(En, 1993:1)

Also in an economy the increase of demand in the labor, financial, money and
foreign trade market can cause inflation. The most widely accepted definition of
inflation in the economics theory is the constant and important rise in theoverall
level of prices. (Uslu, 1993) For this reason we can say this rise must be constant.
The increase in the price of certain goods and services are not enough for us to say
there is inflation. The conditions that must be met are;

a. Even if the increase in price are at different levels, it must reflect to


general prices of goods and servicses widely. In other words to call the increase in
prices inflation in a country not only the price of a few goods or services should
increase but there must be a general increase in prices.

b. The increase in price even if it is general, if it is not constant, happened


only once and later on stabilized will not be accepted as inflation.

c. Another point is that the increase in the overall level of prices should have a
ratio effective enough to effect the economy. It is not possible to give a certain
percentage but for instance an increase between %1-%2 is not a suitable ratio fot
inflation. (Eren, 2002:288)

We can also say that the declining of inflation, reduction in prices does not mean
the purchasing power or income of people will increase. The decreasing of
inflation means prices will increase slower.
1.2 HOW TO MEASURE INFLATION: PRICE INDEX

Indexes can be calculated for various events that can change in time. In
time series indexes take the name of the statistical population they will be
compared. For example the index that will be used to compare prices will be
called price index, the one that will use quantity will be called quantity index.

Like said before to measue the high and constant increase in overall level of prices
which we defined as inflation it is necessary to form a price index. At the same
time like said in the definition, since the increase of price of only one good will
have no meaning indexes that are formed by many various goods and services are
used. (imsek, 1998: 43)

The formed index is used to keep track of the performance of the economy, to
measure whether policies succesfull or not and to interpret the future of the
economy. The problem when forming an index is which period or year should be
taken as base or which goods and services should it cover or use. Should it give
weight to the current or base year? Price indexes according to a starting date tells
us what percentage prices have changed. The inflation rate is a certain baskets
current price and base year price ratio multiplied with 100. In Turkey; index of
wholesale prices (toptan eya fiyat endeksi), consumer price index (tketici fiyat
endeksi), producer price index (retici fiyat endeksi) are some of the price indexes
used.

1.2.1 MEASURING PRICE INDEX

Price indexes can be calculated by taking base and current year quantities of
goods and services of our basket. We will examine two different price index
calculation methods:

i.) Base year weighted index ( Laspeyres Index)


ii.) Current year weighted index ( Paasche Index)

index year price base year quantity


Laspeyres Laspeyres index
base year price base year quantity
Paasche index
index year price index year quantity
base year price index year quantity

Between these two indexes the most used one is the Laspeyres price index. The
Paasche price index mostly puts the demand difference that comes from the
change in consumer tastes due to change in income to count. For this reason the
quantity of purchased goods are heavily used. (Doan, 1987:22). The Laspeyres
index shows the increase in price more than it is and Paasche index shows it less
than it is.

In another picture in practice the difficulty of finding the variable weights every
year causing a delay led to Irving Fisher creating a new index to eliminate this
situation. The Fisher index takes the geometric average of the Lasperyres and
Paasche index. On the other hand the Sidgwick index takes the arithmetic average.
The Fisher index is more commonly used.

1.3 REASONS OF INFLATION


Deficit financing ( Due to the taxes not being able to cover the increased
government spendings)
Economic policies due to election
Raise in wages
Individuals transfering their savings in a liquid way into the market
Constant increase in the level of import prices
The agricultural sector not being able to meet the demand of the country
due to weather conditions
High interest rates
Devaluation that is done senselessly
Governmental institutions that are in loss
Savings being less than investments
Rise of the velocity of money
High based pricing policies
Wrongly implemented economic policies
Agricultural products being purchased by the government by high prices
Domestic and foreign deficitsetc can be listed as some of the reasons of
inflation. (www.kobitek.com.tr)

1.4 HOW TO STRUGGLE WITH INFLATION

To prevent inflation by influencing the monetary structure in other words money


size money and credit policies are used. The money supply is shrinked with
these policies and the credit ceiling is diagnosed. The monetary authorities change
the reserve ratio of banks so their opportunity to create money is limited. With
open market operations the central bank effects the interest rate to control money
supply. The credit and rediscount rates, in other words total liqudity rate is
reducted.

The fiscal policies which require the long run tries to prevent inflation with
governmental spendings and changes in the tax system. For the fiscal policies to
be effective and succesfull it must be supported by observing the changing
economic conditions and other policies. Tax regulations that aims to create
consistency in the budget and government spendings, reduction in aggregate
demand and increase in supply only gives results in the long run. (Ilkn, 191)

To prevent inflation;

Preventing wastage and spendings in government


Tight monetary policy
Increase in government earning
Efficient debt management
Increasing production and efficiency
Applying the right privatization policies
Stability in the foreign currency market

Are some of the precautions that can be taken.

1.5. WHAT IS THE INFLATION TARGETING STRATEGY?

The theoretical and experimental workings have shown us that policies in


developed and developing countries that aim to directly increase production and
employment have only pushed inflation further higher. Thus countries that
observed these policies do not serve its main aim have started using inflation
targeting starting from the years 1990.

Inflation targeting is a framework for monetary policy characterised by the


public announcement of official quantitative targets (or target ranges) for the
inflation rate over one or more time horizons, and by explicit acknowledgement
that low, stable inflation is monetary policys primary long-run goal. (Bernanke,
Laubach, Mishkin and Posen 1999, p. 4)

In more simple words we can say that inflation rate targeting can be defined as a
monetary policy set by the central bank of a country where it sets a certain
inflation rate as a target or a goal. In this point consumer expectations comes to
the arena.

With this strategy the central bank aims to create an expectation that the prices
will continue rising. This causes the consumers in the economy to increase their
demand for goods and services before their prices increase which helps stimulate
the economy.

1.5.1. HOW DOES THE INFLATION TARGETING STRATEGY WORK?

Inflation targeting is quite simple in theory. The central bank of a country


oversees the future rates of inflation and compares it with a target rate that they
are planning to announce. (Amadeo, 2016) This rate is usually the rate that the
central bank believes is most suitable for the macroeconomic conditions of the
economy.

The main question which is usually asked in this situation is that who would want
inflation as a target in an economy? Specifically inflation is widely known as a
bad phenomenon and should be avoided. Actually the real life case tells us the
oppostite. A slowly increasing overall level of prices will always be preffered to
deflation by economists. The case here is that if people expect that prices will be
lower in the future they will not prefere purchasing today. This is where inflation
targeting saves the day.
This involves the public announcement of medium term numerical targets
for inflation with an institutional commitment by the monetary authority to
achieve these targets. Additional key features include increased communication
with the public and the markets about the plans and objectives of monetary
policymakers and increased accountability of the central bank for attaining its
inflation objectives. Monetary policy decisions are guided by the deviation of
forecasts of future inflation from the announced target, with the inflation forecast
acting (implicitly or explicitly) as the intermediate target of monetary policy

IMF,
2015

A well implemented inflation targeting;

- Reduces uncertainity in the long run in terms of inflation


- Reduces the risk of deflation which will decrease demand and cause
economic shrinking
- Reduces the confusions of monetary policies applied by policymakers.
- Most importantly reduces asset bubbles that causes economic crises from
time to time. (Gavin, 2003)

Inflation targeting is a monetary policy that covers 5 factors

1. The announcement mid-term monetary goals to the public


2. Institutionally determining that the first goal of monetary policy is price
stability
3. Not only monetary policy but a strategy that uses many variables
4. The transperency of plans, goals and decesions of monetary authorities
5. The accountability of the central bank (Mishkin 2000: 1-9)

When implementing the strategy some countries determine a rate for the middle-
term and some countries only set an upper limit for inflation. Most countries set a
one digit target to achieve.

"Inflation targeting appears to have been successful in increasing the


transparency of monetary policymaking and in lowering significantly the rate of
inflation in these countries, without any negative consequences for output."
(NBER, 2017)
1.5.2 IMPACT OF THE INFLATION RATE TARGETING POLICY

The inflation rate targeting strategy has been started to be used since the early
90s and ever since its success the strategy became more and more popular
among growing markets especially in developing countries.

It has been nearly 20 years ever since this inflation strategy has ever been applied
by country. The reason many countries have prefered to adopt such a strategy is
not dua to a new economical way of thinking but it is due to the failure of other
monetary policy regimes that have failed since history. (Hammond, 2012; Jahan,
2012)

Even though the practical evidence about the impact of inflation targeting strategy
monetary policy over the fluctuations in inflation do not meet at one point, a wide
range of researches suggested that this strategy is succesfull at both reducing the
inflation rate and the fluctuations in inflation at the same time. For example
Mishkin and Posen who are two economists that have wide studies about this
strategy have done analyzing about the first three countries ever to use this
monetary policy which are; New Zealand, Canada and the United States. They
have also investigated Germany who not totally adopted the policy but used many
of its elements.

They also have a conclusion that the inflation targeting strategy is very good and
successfull when it comes to increasing the transperency of the monetary policies
the central bank is implementing and lowering very highly the inflation rate in the
countries that use the strategy without having loss of output which is important for
the GDP growth of the country.

Simalarly they have come to a conclusion that New Zealand which had a very
high inflation rate before adopting the policy has transformed into a low-inflation
stabilized country with a continouse growth rate.
Graphic 1: Inflation rate of New Zealand at the date of adoption and after

Source: Statistics New Zealand, RBNZ. Notes: Interest rates are excluded (March
2017)

It was also found that inflation rate targeting targeting has been very successful to
the inflation rate low and consistent in Canada but differently the accountability
was not to the government in Canada but it was to the public with special
contracts.

The British case was very supportive and the strategy helped to enduce more low
rated inflation and also helped to maintain a more stable flow at fluctations.
Table 1. The adoption of the inflation rate targeting strategy of various
countries (comparasion)

Source: IMF Staff Reports

As seen in the graph there are 26 countries that use inflation targeting. They fix
the consumer price index (CPI) as their monetary policy goal. Three other
countries Finland, the Slovak Republic and Spain adopted the policy but they
stopped using it when they began to use the Euro as their currency.

PART TWO

INFLATION TARGETING STRATEGY IN TURKEY

2.1 Inflation in Turkey Between 1940-1990


Dramatically the Turkish economy has experienced high inflation rates for many
long years. Especially after the year 1980 it had reached 3 digits and has stayed
high during the 80s, 90s and the beginning of 2000s.

If to start from the early years the average annual inflation rate between 1939-
1949 was %14.3 and a reduction to %8.8 can be seen between the years 1950-
1959. The lowest average interest rate until 1996 ocurrude between the years
1960-1969 which was %4.4. After these years the inflation rate protected its
increasing trend and hit the rate %50.7 betwee 1980-1989; %78.7 between the
years 1990-1996. (Klbay, 1984: page 4-8)

Graph 2: Turkish yearly inflation rate 1956-2012

Source: www.aboutinflation.com

In the 70s Turkey protected its developing trend by the 1970 devaluasion and
the economic precautions that came along with it which positively effected the
balance of payments. The increased amount of foreign currency reserves helped
development of the countries conditions. The oil crises which emerged between
1973-74 forced Turkey to use its foreign currency reserve and move on to short-
term debt. (DPT,1990: page 4). Unfortunatelly especially the ambargo after the
Cyprus movement in 1974, deep holes started to come into the picture in the
balance of payments. At the end of the 70s the economic situations that were
ongoing started to show itself in many different places and caused the inflation
rate to hit 3 digit numbers in the 80s.

The reduction in foreign currency and energy hit the industry sector hardly and
caused the country to operate at innefecient capacity. This reduction in the
industry sector reflected to the GDP and in a paralel way also reflected to the
welfare in a negative way. The service sector shrinked nearly %0.22. The
increased economic depression and bottleneck in the energy negatively shrinking
the industry sector also caused unemployment to increase. In 1979 the
unemployment rate which was %9.7 increased to %14.4 in 1980 and %14.8 in
1981. (Oktay, 1998: page 217)

The reason of the inflation rate rising so much in the 80s was the wrong policies
implemented by the government, the increased money supply, increased public,
foreign and domestic debt and the interest rates constantly rising. The government
started to apply for more debt to finance its spendings, this caused the Turkish
foreign debt stock to rise to 93.643 billion TL from 14,6 billion. This debt policy
rised the interest rates even more and in the same way caused real investments to
decline. (Kumcu, 2000: page 160-180)

These negative incidents on the economy pushed the government at the time to
sign a stabilization programme with the IMF at 24 January 1980 to overcome the
depression. This programme was designed as a safeguard packet and the inflation
problem and balance of payment deficit. It was also announced that with this
programme specialization will be put into account more futher.(ahin, 1995: page
197) On the other hand the breaking the pressure of inflation and regulating the
market was aimed. The inflation that was %107.2 in the year 1980 dropped to
%36.8 in 1981 and %27 in 1982. The inflation which was %30.5 at 1983 after one
year increased to %50( DPT, 1990: p.109).

1981-83 was a comeback year and in the first quarter approximately a growth of
the nearly the same speed of population growth rate which was %2.7 was
accomplished. The second period which covered 1984-1997 was a swinging
period and the average growth was recorded to be % 6.6. 1988 and 1989 is again
slowing period for the Turkish economy. (Karakayal, 2003: p. 189-190). Until
1988 the inflation which was averagly %40 rised upto %75 sharply and settled
down at %60. This situation continoued until 1994 at the same rate. (Tunay, 2001:
p.172)

With the declining in purchasing power the inflation rate also declined and the
internal market shrinked, exports increased. Together with these, after 1980 the
central bank credits had a real decline but the export credits had a real increase.
Again in the same period an increase was reported in the total of banking credits.
(Akg, 1991: p.254-255)

2.1.1 Inflation in Turkey between 1990-2001

Turkey was not able to do much investments between 1985-1990 and due to this
sitiuation the internal demand had lowerd down sharply which leaded to a
stagnation but even though the lowerd demand, interestingly the interest rate had
not dropped back. In 1989 the Turkish lira became convertible and free capital
mobility came along with it. With this improvement foreign capital started
flowing in the country and also an increase in the foriegn reserves were recorded.
But along with this increasement, the central banks control over the interest rates
and exchange rate. New regulations were put into force and the control of the
central bank were constricted with only short-term credits. (Usta, 2003:44)

The monetary program implemented in 1990 at a bases planned to shrink the


central bank. The middle-term monetary program was announced and
implemented. The emmision was tried to increased. The main aims of the
monetary policy program in 1990 was the reserves of the central bank to increase
by %12-22. The specialties of the the program implemented of this term was;

1.) The reserves of the central bank to be regulated again and making it more
transperent.
2.) The programme being middle-term oriented aimed to fight with again
middle-term inflation and creating a reserve that will make it easy.
(Karata,2000:138)

As the continuation of the period before, a monetary program was prepared for the
reserve size and with the help of fiscal policies the inflation rate dropped to %63.
Due to the Gulf War Turkey could not concentrate on the monetary program thus
the first aim shifted from monetary stabilization to financial stabilization. In 1992
the monetary program was announced but the increased budget deficits and the
only way of financing these deficits being the short term liabilites of the central
bank was a barrier to implement the program. With the effect of the war budget
holes increased and alongside so did the interest rates. In such an environment,
instead of using the program the central bank preffered to protect the permanancy
in the Turkish Lira (TL) and the growth in the monetary reserves. There was a
great shrinkage in the TL and Dollar deposits and this shrinkage increased the
interest rates and caused a decline in the central banks reserves. The high interest
rates had an advantage and atrracted foreign financial capital into the counry and
the Turkish lira gained more value in this term. These fluctiations leaded to people
gain from speculations and a crises that was caused by a trust issue. (Karata,
2000:138)

Graph 3: Turkish Inflation rate 1970-2010

Source: Turkish Statistical Institute

The 90s are years where the stabilization is corrupted and inflation rised sharply
in turkey as seen in graph 2. In 1992 the growth rate was under %2 and between
1990-1993 was %7. The risk that came along with unstability caused a capital
outflow from Turkey and the trust to the Turkish Lira both from the citizens and
foreign investers lowered down severely. The expectation of devaluation
increased the demand for for foreign currency but unfortunatelly the central bank
could not correspond to the demand due to its limited reserves. With the foreign
exchange gap Turkey got out of being seen as a country that investment is
attractive, but started to be seen as country that speculative gains can be earned.
(Aydoan; 2004:95)
The early election in 1995, the membership to the customs union and the political
instabilities and the stand-by agreement done with the international money fund
(IMF) being corrupted, all these improvements that caused an unclear view in the
political and economic arena the following year a monetary policy that will aim a
more stable financial market environment was to be planned. (Kesriyeli, 1997:28)

At he end of the 90s even though the rised debt and a long term high inflation
was not in a crises but rather that was in a situation that was a potential for a
crises. Also the crises that was waiting at the door was due to the banking sector
in Turkey. Most of the debt instuments was coming from the banking sector and
the short term financial capital flow was the only way of financement. As for the
macroeconomic improvements the harmony of inflation to the program was
happening slowly. (Ekinci, 2002:100). Even though the goal was set to be %25,
the CPI was %39. (Ekinci, 2002:100)

In the year 2000 the main aim inflation policy was put to be fighting inflation
again. The chronical inflation that continoued for years was planned to be dropped
to 2 digits. Alongside the inflation was accomplished to be the lowest rate of 14
years. After he December 2000 crisis with the help of IMF a revival of the
financial capital flow started but with the increased fragileness of the banking
sector the market which was already afraid started to panic with the politicle
instabilities. The trust for the exchange rate policies lowered again so the central
bank decided to move onto a floating exchange rate policy.

The central bank announced that the nominal anchor magnitude will be used as a
nominal anchor. With the floating exchange rate regime the central bank only
interfered to the exhange rate only to prevent speculative actions in the market in
the short-run. At 5 May 2001 the central bank announced that monetary stability
will be its main goal and establised a currency board also instrumental
independence was declared. (TCMB,2001)

2.2 Turkey switching to the inflation targeting strategy

The high and chronical experience of inflation that continoued for many years and
the sturctural problems that came along with it, the instability in the financial side
and the undisciplend regime caused the strategy to start in a delayed way.
The Turkish Central Bank decided to use the inflation targeting strategy after the
2001 crises and between the years 2002-2005 tried to create an environment
where the strategy can be used in the most efficient way. After the positive returns
of this new monetary policy that was implemented all the requirements were met
for the strategy and in the year 2006 the open inflation targeting strategy started to
be used.

2.2.1 Implicit inflation targeting regime in Turkey (2002-2006)

Like most of the countries that planned to pass on to the inflation targeting regime
Turkey had to meet the pre-conditions or at least some of them before the
adoption process. For this reason between 2002-2006 this preperation which is
also called implicit inflation targeting was implemented.

Even though not being directly seen as a crtiticle condition, for the regime to be
succesfull the starting inflation rate must not be too high and fluctuating. A
inflation rate that is too high and fluctuious will make it hard to forecast the
inflation rate upcoming in a healthy way and also will make it hard to create the
trust neccesary to control the expectations. For these reasons the inflations fever
must be dropped by the central rate at least to a healthy rate before switching to
the policy. (TCMB, 1999)

In Turkey for long years a fluctuating and high inflation was experienced. At 2002
where Turkey passed to the implicit inflation targeting the CPI was over %70 but
in this period a great success of dropping it to under %10 was accomplished and
at the year where Turkey fully switched to open inflation targeting strategy the
rate dropped to %7.7. (Graph 2.2)

One of the most important conditions for a succesfull switch to the new policy is
undoubtabally the independence of the central bank and for the central banks first
goal to be price stability was achieved with the new regulation in the year 2001.
At the new regulation made it clear that the main and first goal of the central bank
is to achieve price stability and only the central bank will choose which
instuments and policies will be used to achieve this goals. On the other hand with
this regulation it was forbidden for the bank to give loans to the public sector.
(TCMB,2001b)
Graph 2.2 The yearly CPI rates (%) in Turkey (2002-2005)

Source: TUK
Another condition which was achieving fiscal discipline and eliminating fiscal
pressures was taken seriously so new structural reforms and tight fiscal policies
endured a success in the process.

At the end of 2001 respectively the ration of budget spendings which were %36.2
and %17.1 (interest rate spendings) to the GDP at the end of 2005 fell to %24.6
and %7 again respectively. The budget gap ration to the GDP fell from %11.9
starting point (2001) to %1.1 in 2005. Additionally the non-interest surplus
continoued increasing startin from 2002 to 2005 upto %6. The public dept stock is
also a success story in this picture. At the end of 2001 respectively the external
debt, internal debt and total debt which were %50.9, %23.2 and %74.1 ration to
the GDP dropped to %37.7, %13.4 and %51.1 at the end of 2005 (Table 2.1).

The dolarization level not being high is another condition needed for inflation
targeting. As a result of high inflation the investors trust to the turkish lira
declined too much and the dolarization level of Turkey starting from the 90s was
high. After the 2001 crises the dolarization level broke a historic record and the
assets in foreign currency ration to total assets reached %43 (Aknc ve dierleri,
2005).
This situation changed widely after the implentation of the new policy started
between 2002-2005 and the dolarization level declined every year until 2005 to
%25 ( Garaphic 2.3)

Table 2.1 Central Administration Budget Balance and Debt Stock (Ratio to
GDP %)

2001 2002 2003 2004 2005


Budget 36.2 34.1 31.1 27.2 24.6
Spendings
Interest 17.1 14.8 12.9 10.1 7.0
Spendings
Budget - -
Balance 11.9 11.5 -8.8 -5.2 -1.1
Non-
Interest 5.2 3.3 4.0 4.9 6.0
Balance
Internal 50.9 42.8 42.7 40.2 37.7
Debt Stock
External 23.2 26.5 19.4 16.5 13.4
Debt Stock
Total Debt 74.1 69.2 62.2 56.6 51.1
Stock
Source: Secreteriate of Treasury

In the high inflation environment the Turkish lira which kept losing value and
came to a situation where it had alot of zeros came to a respective point again and
as a solid proof the 6 zeros of the Turkish Lira was thrown away in the year 2005.
Graph: 2.3 The dolarization level at a percentage rate

Source: Aknc ve dierleri (2005)

At the 2002-2005 period another pre-condition was that the banking sector should
be at a solid structure and the financial markets should be strong and improved
with regulations and practicularly in daily life. Firstly the changing in the banking
law and many regulations, this sector was heavily put onto hand by the monetary
authorities. (BDDK, 2002)

When we look at the Financial Soundness Index which shows the banking
sector risks, the index which firstly took the value 100 at the december 2000 and
February 2001 crisis fell under the level 80 and started increasing after 2002 and
is seen to hit 115. (Graph 2.4)
Graph 2.4 The Financial Soundness Index

Source: TCMB, 2006


The central bank being trustable is another important point. As a propasition for
this trust the inflation target and the inflation difference is a indicator. If this
difference is constantly declining it means the trust to the central bank is
increasing if it is not declining it means the trust is less. As seen in graph 2.5 this
difference in Turkey was %15 in 2002 but kept declining until 2005 and settled at
a rate of %1. Leaning to this point we can say that the trust to the central bank in
Turkey kept rising and the economic units started arranging their expectations
according the forecast of the central bank instead of looking at the previous rates
in earlier years.

Graph 2.5 Enflation expectation and targets (2002-2005)


Source: TCMB
For the central bank to do healthy forecasting, having a wide and accountable
information set and strong forecasting models were the last pre-condition needed.
For this subject until 2005 important improvements were seen. The inflation rate
and its fluctations declined at a important number, this situation helped to do
more healthier forecasts. Starting from 2001 Augustos the central bank started to
implement an expectation survey twice a month. The goods and services basket
used in forecasting were more consistent and practicle for daily life.

As seen until 2002 most of the conditions for inflation targeting were not met in
Turkey but the implicit inflation targeting term was used between 2002-2005 very
well and can be considered very successfull. At 2006 most of the pre-conditions
were met and Turkey passed onto the open inflation targeting strategy.

2.2.2 The Open Inflation Targeting Regime Period (2006-)


The central bank of Turkey declared that they have switched to the new regime in
2006 and announced that the conditions needed to addopt the new monetary
policy were met highly and also reported that the goal of dropping the pressure of
inflation will move on to a price stabilization policy.

2.2.3 The Main Frame of the Turkish inflation targeting regime

The characteristic of the inflation target

The inflation target of Turkey is declared as a point target. The advantage is that
it is easy to understand and also sets an advantage in terms of communication and
has more power in dropping inflation expectations. It measures the cost of living
really well and can be understood by the public better. The rate measured in the
CPI is the target rate.

Determining the inflation targets

The inflation targets are chosen for a 3 year period. For the public trust to be
accomplished the decision is announced with the the contribution of the central
bank and the Turkish National Assembly together.
The uncertainity band

The point target to be accomplished is nearly impossible in real life so just like
other countries that use a point target, Turkey has a uncertainity band around the
point target. An uncertainity band can be defined as an extreme swing between
the lower and upper bands. The improvements in the petrol prices, international
liquidity conditions and global risks, taxes, public price arrangements which are
out of the control of the central bank can cause serious swings in the inflation.
(TCMB,2005)

At this frame at both sides the uncertainity gap is declared to be 2 points at both
sides.

Accountability of the central bank

The accountability of the central is warrantied at Article 42. With these sentences;

If the central bank does not meet the target it has announced in the given period
of time or if there is a probability it might not meet the target it will give the
public and government written information and the needed announcement.

In this frame we can say that the central bank has to write a letter if there is a
situation were it may not meet its target or pass the uncertainity band by more
than 2 points.

The conditions to change the targets

For the trust in the monetary policy not to be shuttered and the power over the
expectations not to weaken it is important for the central bank not to change the
target rates.

The target may change due to extreme climate disasters, wars and improvements
that are beyond the control of the central bank. (TCMB,2006a) The new targets
are chosen with the partnership of the central bank and the Turkish National
Assembly. The economic shocks that are not permanent does not change the
target but may change the forecast. In this situation the economic units should
take the short-term inflation forecast and in the long-term the target as a reference
for the future.
The communication process

The inflation report has become the most important instrument for announcing the
targets to the public. This report is published 4 times a year; january,april, july
and october. This report contains the flow of the inflation and the general
macroeconomic and financial improvements widely and also has the inflation
forecasts of the central bank. Also in the reports there are the probable future
monetary policies and the risk factors and what will happen if these risks come to
the picture also what the central bank can do to interfere in this situation.

The inflation report is one of the most important factor of the inflation targeting
regime and is also very important for the accountability concept. If the target is to
come and go between the band or pass it the reasons of the fluctuations and the
central banks policies to overcome the passing are reported.

3.1 The evaluation of the inflation targeting regime in Turkey

The unsuccesfull inflation policies in Turkey led the monetary authorities to a new
regime search. For this reason the central bank gained its independence in 2001
and started using the open infation targeting regime in 2006. At the end of 2001
the central bank announced it will use a middle-term, stabilization oriented
program. Only for a problem that countries like Turkey who have had a long time
high inflation problem have a trust problem and for this reason switching regimes
can be slower when compared to other countries. (Airaudo,2004:22)

Table: 3.1 The Turkish Inflation Performance

Source: Trkiye Cumhuriyet Merkez Bankas (http://www.tcmb.gov.tr)


In 2002 Turkey adopted the implicit inflation targeting regime. As seen in graph
3.1 this was a succesfull move and after the pre-conditions were met in 2006 the
Turkish central bank adopted the open inflation targeting strategy. After the
announcement unfortunatelly Turkey felt the economic shocks ongoing gloabally
and wentr through events that slowed down the declining of the inflation rate. The
events caused the open inflation targeting regime to be unsuccesfull but yet again
for a healthy evaluation the period of time is not enough because inflation
targeting is not a few year but it is a long-term strategy. When looking by this
window we can say that for a proper performance analysis not only the open
inflation targeting regime but also the implicit regime must be taken into account
in the series.

Graph 3.1 The Turkish Inflation Targeting Performance

Source: Trkiye Cumhuriyet Merkez Bankas (http://www.tcmb.gov.tr)

The Turkish central bank starting from 2002 for a four year period used short-
term interest rate as a monetary instrument and prepared for the open inflation
targeting regime. In the period the implicit targeting was applied policies that
were suitable for the floating exchange rate were followed. (Esenay,2004)

In this period which can be called as the preperation period inflation targets were
met and were even lower than the target. Thanks to this inflation expectations
were kept under control. The financial market and banking sector reforms were
done under very strict regulations and these markets grew stronger and the
fragileness lowered. Shortly to say this period that can be declared as the
preperation period was very succesfull at droping the inflation and putting it under
control.
CONCLUSION

When it comes to the inflation targeting regime we can say that it is too early to
come to a conclusion whether Turkey is succesfull or not. On the other hand the
monetary policies implemented through the Turkish history due to crisis that came
one after another, thanks to the structural reforms important improvements have
been brought to life in the inflation rate along with high growth rates.

This period where inflation dropped, with the lowered uncertainity and interest
rates investments increased and the capacity usage increased so did production.
We can also say that exports have also increased with these improvements and the
ration of Turkey in the global market increased.

All of these led to economic growth. In 2007 where there was an election, the
environment of uncertainity and the mortgage crises caused the inflation to rise
globally. Due to this global effect exept Brasil, nearly all countries that used the
inflation targeting was over the target.

The success Turkey achieved in implicit targeting due to various reasons


especially the external shocks could not continoue in the open targeting period.
But still even though these negative improvements the reforms that were
accomplished and the lowered fragileness allowed Turkey to be more flexible
when it came to external shocks.

If to talk about the period we are in it is not healthy to come to a strict conclusion
whether the policy was succesfull. Even though the targets for 2006, 2007 and
2008 were met the expectation were under the rate that occured. This shows that
the central has gained control over the economic agents expectation thanks to the
policy even though the negative sides. From this angle it is succesfull but due to
various reasons in some periods not succesfull. To come to a certain conclusion it
is more healthy to wait for the internal and global crisis to finish.
Sources

Airaudo, Marco (2004). Can Turkey Move to Explicit Inflation Targeting? Some
Lessons from a Simple Model of Policy Design with Imperfect Credibility, Lab
on European Economics, Rome.

Aydoan, Esenay (2004). 1980den Gnmze Trkiyede Enflasyon Serveni,


Celal Bayar niversitesi, Ynetim ve Ekonomi Dergisi, Cilt 11, Say 1, Manisa.

AKG, ztin; Ekonomide Gerei Aray , Balam Yaynlar , istanbul, 1991.

Doan, ., (1987) Verimlilik Analizleri ve Verimlilik Ergonomi likisi,


zmir Ticaret Borsas Yayn No: 31, zmir, ss. 82-83.
DPT; 1980 den 1990a Makroekonomik Politikalar Trkiye Ekonomisindeki Gelimelerin
Analizi ve Baz Deerlendirmeler, Ankara, 24 Temmuz 1990.

En, E., (1993) Enflasyon: Tanm, lm ve Sorumlular, Ekonomik


Yaklam, Cilt:4, Say: 8, ss. 1-8.
Eren, A., (2002) Trkiyenin Ekonomik Yaps ve Gncel Sorunlar, Mula
niversitesi Yaynlar: 11, ktisadi ve dari Bilimler Fakltesi Yaynlar: 02,
Mula, ss. 288.
Frisch, H. (1989) Enflasyon Teorileri, (ev. Oktay E ve A. Yiidim), Elif
Matbaaclk: Ankara.
http://www.aboutinflation.com/inflation-rate-historical/turkey-inflation-rate-
historical-chart
http://www.nber.org/digest/apr98/w6126.html
https://www.imf.org/external/country/ton/index.htm?type=9998
Inflation Targeting: Definition, how it works, Kimberly Amadeo 27.09.2016
Inflation Targeting: Lessons from the International Experience- Ben S. Bernanke,
Thomas Laubach, Frederic S. Mishkin, Adam S. Posen Page 4.
Inflation Targeting: Why it works and how to make it better, William T. Gavin
Page 5
lkin,A. (1990) Byk Ekonomi Szl, Cem Ofset A..: stanbul.
KARAKAYALI, Hseyin; Trkiye Ekonomisinin Yapsal Deiimi, Gle Matbaaclk,
2.Bask, izmir, 2003.

KILIBAY, Ahmet; Trk Ekonomisinde Enflasyonun Anatomisi, stanbul niversitesi ktisat


Fakltesi Yay n , No:507, stanbul,1984.

KUMCU, Ercan; istikrar Araylar , Doan Kitaplk A. ., 2000


Mishkin, Frederic (2000). Issues in Inflation Targeting, Price Stability and the
Long Run Target for Monetary Policy Conference, Ottawa, Canada.
AHN, Hseyin; Trkiye Ekonomisi, Ezgi Yaynlar, No:167, Bursa, 1995

imek, M., (2003) hracata Dayal-Byme Hipotezinin Trkiye Ekonomisi


Verileri ile Analizi: 1960-2002, Dokuz Eyll niversitesi BF Dergisi, 18(2), ss.
43-63.

TUNAY, Batu K.; Hiperenflasyon ve Hiperenflasyon Srecinde Para ikamesi, Beta Basm A.
., istanbul, Mays, 2001.

Uslu, E. (1993) Balca Enflasyon Teorileri ve 1980li Yllarda Trkiyede


Enflasyon, Yaynlanmam Yksek Lisans Tezi, Marmara niversitesi Sosyal
Bilimler Enstits: stanbul.

www.kobitek.com.tr

Ycel, . H., (1997). Bilim Teknoloji Politikalar ve 21. Yzyl Toplumu. DPT
Sosyal Sektrler ve Koordinasyon Genel Mdrl Aratrma Dairesi Bakanl,
Ankara, 127s. http://ekutup.dpt.gov.tr/bilim/ycelih/biltek.pdf (10.10.2007)

http://www.tuik.gov.tr/Start.do Tketici Fiyat Endeksi (yllk) % (1970-2010)

Usta, Blent, (2003). Enflasyon Hedeflemesi: Gelimekte Olan lkelerde


Uygulanabilirlii ve Trkiye rnei, Ankara, Trkiye Cumhuriyet Merkez Bankas
Uzmanlk Tezleri.

Karata, Muhammed (2000). 1990 Sonras Trkiyede Uygulanan Para Programlar,


Balkesir niversitesi Sosyal Bilimler Enstits Dergisi Cilt 3 Say:4 Balkesir.

Aydoan, Esenay (2004). 1980den Gnmze Trkiyede Enflasyon Serveni, Celal


Bayar niversitesi, Ynetim ve Ekonomi Dergisi, Cilt 11, Say 1, Manisa.

Kesriyeli, Mehtap (1997). 1980li Yllardan Gnmze Para Politikas Gelimeleri


Trkiye Cumhuriyet Merkez Bankas Yaynlar, Ankara, Aratrma Genel Mdrl,
No. 97/4, Ankara.

Ekinci, Nazm Kadri (2002). Anatomy of Recent Crisis in Turkey Journal of


Economic Cooperation 23.

TCMB, (2001). Yllk Rapor 2001, (evrimii) http://www.tcmb.gov.tr.


Trkiye Cumhuriyet Merkez Bankas. (1999). 2000 Yl Enflasyonu Drme Program:
Kur ve Para Politikas Uygulamas. Ankara.
Trkiye Cumhuriyet Merkez Bankas. (2001b). Plan ve Bte Komisyonu Merkez
Bankas Sunuu. Ankara.
Aknc, ., zer, Y. B. ve Usta, B. (2006). Dolarizasyon Endeksleri: Trkiyedeki
Dolarizasyon Srecine likin Gstergeler. Eriim: Ocak 2011, TCMB alma
Teblii, 05/17. http://www.tcmb.gov.tr/research/discus/WP0517.pdf
Hazine Mstearl. (2009). Hazine statistik Yll. Eriim: Aralk 2010.
www.hazine.gov.tr
Bankaclk Dzenleme ve Denetleme Kurumu. (2002). Bankaclk Sistemi Yeniden
Yaplandrma Program. Sunum. Ankara
Trkiye Cumhuriyet Merkez Bankas. (2006b). Finansal istikrar Raporu Haziran 2006,
Say:2. Ankara.
Trkiye Cumhuriyet Merkez Bankas. (2006a). Enflasyon Hedeflemesi Rejimi. Ankara.

Trkiye istatistik Kurumu. (2009). istatistik Gstergeler 1923-2008. Ocak 2011,

http://www.tuik.gov.tr

Trkiye Cumhuriyet Merkez Bankas Kanunu. Kanun No: 1211

http://www.tcmb.gov.tr/yeni/banka/kanun.html

Anda mungkin juga menyukai