An interim assessment of the ongoing Turkish monetary and macroprudential experiment

Abstract

Duty called and central banks, in response to the global crisis, have risen to a level of preeminence that is presumably unprecedented in modern economic history. The Central Bank of Turkey (CBRT) not only had to go with the flow but also led to some heated debates in the realm of market analysts regarding the policies it has been pursuing. “Unorthodox” and “unconventional” were the labels attached to the policy mix announced by the CBRT at the end of 2010. It should have come as no surprise to anyone that had been introduced to the (sub)field as much as we tried to outline in this study that the CBRT placed an overwhelming emphasis on current account deficit and credit expansion as the ingredients of its financial stability argument in the enhanced objective function. Credit expansion is by and large the outcome of a micro decision making process, that of loan policy of banks on a single entity basis ultimately aggregated across banks. Current account dynamics is much more intricate than credit expansion although to some extent linked to it and its analysis requires more vigor and is likely to subject to a higher degree of noise. Our findings suggest that when properly investigated, credit expansion and current account dynamics do not depict the failure story that markets thought the CBRT has suffered from following the initiation of the “unconventional” policy mix. Another crucial inference we reach is that containment of credit expansion significantly reduces the probability of moving into a higher current account deficit regime.