Implicit asymmetric exchange rate peg under inflation targeting regimes: the case of Turkey

Abstract

Especially, after the 2000s, many developing countries let exchange rates float and began implementing inflation targeting regimes based on mainly manipulation of expectations and aggregate demand. However, most developing countries implementing inflation targeting regimes experienced considerable appreciation trends in their currencies. Might have exchange rates been utilized as implicit tools even under inflation targeting regimes in developing countries? To answer this question and investigate the determinants of inflation under an inflation targeting regime, as a case study, this paper analyzes the Turkish experience with the inflation targeting regime between 2002 and 2008. There are two main findings of this paper. First, the evidence from a Vector Autoregressive (VAR) model suggests that the main determinants of inflation in Turkey during this period are supply side factors such as international commodity prices and the variation in exchange rate rather than demand side factors. Since the Turkish lira (TL) was considerably over-appreciated during this period, it is apparent that the Turkish Central Bank benefited from the appreciation of the TL in its fight against inflation during this period. Second, our findings suggest that the appreciation of the TL is related to the deliberate asymmetric policy stance of the Bank with respect to the exchange rate. Both the econometric analysis from a VAR model and descriptive statistics indicate that appreciation of the Turkish lira was tolerated during the period under investigation whereas depreciation was responded aggressively by the Bank. We call this policy stance under the inflation targeting regimes as "implicit asymmetric exchange rate peg". The Turkish experience indicates that, as opposed to rhetoric of central banks in developing countries, inflation targeting developing countries may have an asymeyric stance toward exchange rates and favour appreciation of their currencies to hit their inflation targets. In this sense, IT seems to contribute to the ignorance of dangers regarding to over-appreciation of currencies in developing countries.

Threshold Regression Model for Taylor Rule: The Case of Turkey

“…Moreover, currency depreciations deteriorate confidence, worsen inflation expectations, and have the potential of leading to depreciation-inflation spiral (Arbalı, 2003; Kara et al, 2007;Kara and Ögünc ¸, 2008;Karagöz et al, 2016;Civcir and Akc ¸aglayan, 2010;López-Villavicencio and Mignon, 2017). As emphasized by Benlialper and Cömert (2015), because of its impact on inflation, exchange rate appreciation has played an important role as a dis-inflationary tool in Turkey. Hence focusing on the currency depreciation may not necessary mean that CBRT loses its objective of fighting inflation.…”

¿Se puede hacer frente a la crisis por el COVID-19 en México con las políticas monetaria y fiscal actuales?

“…Al menos los bancos centrales de las economías en desarrollo deben considerar estos y otros choques del lado de la oferta que, en cualquier caso, reducen la efectividad del mecanismo de transmisión de la política monetaria. De ahí que los bancos centrales de estos países tengan incentivos para recurrir al tipo de cambio y adoptarlo como una segunda herramienta de política con el objetivo de alcanzar la meta de inflación (véase Svensson 1999;Hüfner, 2004;Edwards, 2006;Mántey, 2009;Benlialper y Cömert, 2016;Benlialper, Cömert y Öcal, 2017). En este sentido, también es importante observar que los bancos centrales pueden incorporar la tasa de interés del extranjero a su regla de tasa de interés como una alternativa para controlar el tipo de cambio nominal y su efecto en la tasa de inflación.…”

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“…As to the first channel, as mentioned above, the institutional framework of an ITR incentivizes the central bank to an asymmetric pattern of FX interventions, introducing an appreciation bias into the exchange rate (Barbosa‐Filho, ; Benlialper and Cömert, ; Epstein and Yeldan, ; FitzGerald, ; Galindo and Ros, ; Vernengo, ). Whereas interventions during appreciation pressures are inconsistent with an ITR (exchange rate appreciation can even help to contain inflationary pressures through lowering tradable goods prices), interventions during moments of depreciation might be necessary to avoid negative pass‐through effects into domestic prices .…”

“…Benlialper and Cömert (), using the example of Turkey, go so far as to call this situation an ‘implicit asymmetric exchange rate peg’ in DECs.…”