Augmented Taylor rule analysis: BRICS countries and Türkiye (2003-2022)

The recent global transformation in the world economy has brought along many socio-economic problems. The Latin American crisis which started in the 1990s with the effect of the developing global financial system, Asian crisis, trade and exchange rate wars, Mortgage Crisis, Pandemic Epidemic Covid-19 and wars, have confronted the economies of both developed and developing countries with macroeconomic problems. In this context, the inflationary process, which has deeply affected the world economy, especially in the recent period, has led central banks to take new measures and implement tight monetary policies that will initiate the disinflationary process. With the adoption of the inflation targeting strategy by central banks in the 1990s, central banks started to use the policy rate and short-term interest rates to suppress inflation. The rule developed by J. B. Taylor (1993) is a guide in the interest rate decisions of central banks. In the first version of the rule, it was argued that inflation and changes in the output level were effective on the interest rate. However, due to the effect of the exchange rate on macroeconomic variables in the economies of developing countries, the augmented Taylor rule has been obtained by including the exchange rate in the Taylor rule over time. In this context, the main objective of this dissertation is to test the extended Taylor rule which includes the exchange rate, in Türkiye and BRICS countries for the period 2003:01-2022:12. For this purpose, we utilize monthly data on interest rate, industrial production index, consumer price index and exchange rate index series and investigate the cointegrating relationships between them using the ARDL bounds testing approach. According to the findings of the study on the effect of output gap, inflation gap and exchange rate gap on short-term interest rates in these countries, the effect of inflation gap on interest rates is statistically insignificant for India and China, while the effect of exchange rate gap on interest rates is statistically insignificant for Brazil and South Africa. On the other hand, the effect of output gap on interest rate is statistically significant for Türkiye and Brazil.