Interest Rate Reactıon Functıon and Taylor Rule for Turkey: Coıntegratıon on Approach

ABSTRACTINTEREST RATE REACTION FUNCTION and TAYLOR RULE for TURKEY:COINTEGRATION APPROACHDilara ErtuğIn recent years it has been widely accepted that price stability is a preconditionfor sustainable economic growth and increase in employment. Therefore mostCentral Banks are focused on price stability target. Starting from 1990s inflationtargeting became an official policy for most of the Central banks.Since 1999 inflation targeting policy has been an important issue for Turkey.Stability program which was applied between 2002-2005 was called as implicitinlation strategy. The Central Bank of the Republic of Turkey (CBRT) adopted aninflation targeting regime starting in January 2006.This brought up CBRT?s polices to use short-term interest rates as a mainmonetary policy tool, to take interest rate decisions in the light of discussions andevaluations done during the Monetary Policy Commity meetings. and to whether ornot to use Taylor type of rule to set target interest rate.In this study, in order to understand CBRT?s monetary policy decisions,existence of Taylor type rule is examined for different time periods and CointegratedVector Autoregression method which takes into account of data?s time seriescharacteristics is used. Different results are found for two different time periodscovered in the study and inflation targeting?s efficiency was observed as a monetarypolicy tool. It is observed that while CBRT sets its monetary policy it takes intoaccount growth and employment in addition to price stability, and only after year 2000its behavior of setting interest rate can be consistent with inflation targeting. Moreoverthe study draws attention to the requirement that estimation of the output gap, avariable taken into consideration by the monetary authority while determining themonetary policy, should reflect the dynamics of the country?s economy