Alternetive monetary policy strategies and inflation targeting strategy:The Turkish case

Price Stability has been a primary target for monetary policies because of the issue of inflation emerging as a serious problem in 1970s. Although monetary policy applications have different features across the countries according to their social and economic conditions and the positions of their central banks, price stability has kept this critical importance as being the ultimate goal. In the second half of the 1970s many countries has left the interest rate and exchange rate targeting, instead they have led to monetary aggregates. That monetary targeting being successful depends on long termed stable relation the targeted monetary aggregates and inflation. In short, money demand is supposed to be stable. After 1990s,it is carried out inflation targeting such a new strategy, since monetary targeting and exchange rate targeting methods couldn?t manage to eliminate inflation. Exchange rate and monetary aggregates that have been used as an intermediate target have failed to achieve price stability, so inflation targeting has been occurred as an alternative monetary policy strategy. Inflation targeting strategy is a monetary policy strategy which contains directly inflation targeting instead of monetary variables and/ or intermediate targets as exchange rate. According to this strategy monetary authorities have to implement monetary policy for achieving predetermined and publicly announced medium term numerical inflation target. Transparency and accountability are also very important elements of inflation targeting strategy. In order to perform inflation targeting strategy, some pre-conditions must be achieved. These are; central bank?s independency, price stability as the 2 primary target of monetary policy, eliminated fiscal dominancy, stable fiscal system and developed fiscal markets. In this sense, the aim of this study is: To define the goals and tools of monetary policy theoretically; to define the alternative monetary policy strategies such as exchange rate targeting, monetary targeting, interest rate targeting and nominal income targeting strategies; to array the advantages and disadvantages of these alternative strategies and to analyse the inflation targeting strategy, which is the main aim of the study, in detail. Besides, implicit inflation targeting which is carried out in Turkey in 2002-2005 period, direct inflation targeting strategy which beginned after the implicit inflation targeting in Turkey in 2006 and the state of the price stability as a consequence of the direct inflation targeting strategy will be analysed.