Inflation targeting and the monetary policy rule application of Turkey

The aim of this study is to predict the back looking reaction function of the Central Bank of Turkey during the implicit inflation targeting (2002-2005) and explicit inflation targeting implementation period (since 2006) as well as identifying the main properties of the inflation targeting strategy implemented. A model is constructed over the monthly data by using the Generalized Method of Moments acording to open economy version of Taylor Rule. The reaction of the real deposit interest rates to deviations from inflation targets, output gap and exchange rate volatility is investigated. According to analysis results, the deviations from inflation targets, output gap and the exchange rate volatility play a significant role in the determination of the interest rates.