Asymmetry in Inflation Targeting

Abstract

Following the world financial crisis beginning in the last quarter of 2008, aggregate demand and commodity prices have declined sharply leading to a fast decline in world inflation. This different and new period reflects the rise in risk appetite leading to high fluctuations in the short term capital flows. World central banks revised their monetary policy to the changing conditions taking into account financial stability. In 2002, Turkish central bank adopted inflation targeting (in the implicit form) to maintain price stability. After 2008, following the developments in global markets, Turkish economy reflects similar characteristics in the form of decline in inflation rates. Together with the changes in the economic conditions, estimating monetary policy models in the form of constant-coefficient and symmetric specification may lead to erroneous interpretations. This study analyze the existence of structural break(s) and asymmetric behavior for the 2003-2016 period. The paper also examines the monetary policy model under New Keynesian fashion. Turkish monetary policy investigated for the period presents October 2009 as the break point under different models and structural break tests. Asymmetric reactions to interest rate, output and exchange rate are observed suggesting the different monetary preferences of the central bank of Turkey.