Inflation targeting and the reasons of its divergence

Inflation Targeting is a special policy regime that has been established after the 1980s in an effort to fight against the then relatively high inflation and achieve price stability. It was first applied by the Reserve Bank of New Zealand and led to pretty nice outcomes. Later on, it has been applied successfully in many other countries, including Turkey. In 2001, after the most severe economic crises of the history of the young republic, Turkey altered its monetary policy regime that had previously been based on the fixed exchange rate regime and switched to the implicit inflation targeting. The Central Bank of the Republic of Turkey implemented that target between 2002 and 2006. Taking into consideration, all the prerequisites that had been provided by applying the implicit inflation targeting policy and starting from 2006, the CBRT officially began establishment of the inflation targeting policy. According to the inflation targeting policy, authorities who are engaged in money suply control, have to arrange their policies according to the predetermined middle term quantitative inlation targets. The most important components of an inflation targeting regime are transparency and accountability. This thesis has primarily taken into consideration the main instruments of an inflation targeting regime and aims to explain the common threats that has been observed in Turkey.