The relationship between the macroeconomic variables during the inflation targeting period: Turkish case

The inflation targeting regime has been adopted and implemented by both developed and developing countries around the world as an increasingly popular monetary policy tool for the last 50 years. Turkey, faced with high and variable inflation problem for many years, has taken to implement the inflation targeting regime in 2006 as a solution to this problem and has been successful in general. This study focuses on the relationship between macroeconomic variables in the period of inflation targeting and investigates whether they act in accordance with the theory. In the study, the vector autoregression model (VAR) model was established for the period of February 2004 - November 2011 in which common data could be obtained and the variance decomposition results were obtained by impact-response analysis. Variables included in the analysis; industrial production index for production, consumer price index for inflation, Credit Default Swap (CDS) premium for country credit risk, US Dollar and Euro basket index for exchange rate variable and 1 month deposit rate for interest variable. In order to control the external demand, the Eurozone industrial production index was used as the external variable. While the variance decomposition analysis results show that the growth and country risk premium variables are highly exogenous, the country's risk premium and growth in explaining the changes in inflation, the country's risk premium and inflation in explaining the changes in interest rates, and the country's risk premium in explaining the changes in exchange rates are effective. The results of impact- response analyzes are in line with the theoretical expectations for the macroeconomic variables. Impact- response analyzes show that a positive shock in inflation has a statistically significant positive effect on both interest and exchange rate variables. Another finding obtained from the study is that an increase in CDS premium has a significant and strong positive effect on inflation, exchange rate and interest.