Inflation targeting: Turkey

Inflation is an important issue due to its impact on economic growth. Therefore, some policies like inflation targeting are utilized in order to lower inflation rates. This paper aims to cover VAR analysis in which 1987.1- 2008.1 period data including economic growth, general price level, money supply, deposit rates, currency, fiscal dominance are used as inputs. These variables have been selected because of their importance on economic performance and disinflation policies. Results showed that although economic growth is not affected by any these variables, it affects the fiscal dominance directly and others indirectly. On the other hand, it is determined that fiscal dominance is mostly affected by money supply, general price level and deposit rates and also that the general price level has been under the effect of fiscal dominance and deposit rates. Interest rate which is one the most effective tools for inflation targeting policy adopted central banks can also be used by TCMB. TCMB can derive benefit from interest rates while handling demand inflation. However, TCMB have to be careful about the undesirable effects of inflation, as cost inflation. Furthermore, fiscal dominance can be controlled through interest rates and will general price level positively.