Analysis of Taylor rule with in the context of rule based monetary policies and specific rule discretionary policies discussion: Theory and an application on Turkey

Whether the central bank's monetary policy should be based on rules or voluntarily is one of the important issues discussed for a long time in the economic literature. Economists and policy makers agree that monetary policy must be applied within the framework of a rule, and that voluntary policies may lead to the problem of time inconsistency in the economy. However, there is still no consensus on what should be the rule in the literature. There are also different applications in the literature on rule-policy applications that the central bank will apply. One of these different practices is Taylor rule. The rule implies that the central bank central bank's should set the short-term nominal interest rate level depending on the rule of the economy. On the economic actors side, on study period for 2001: 08-2017: 09; the exchange rate variable, which is easy to understand and represent a simple rule in terms of implementation, is included as a model. And the validity of extended Taylor's rule is tested for Turkey's economy. The GMM ( Generalized method of moments) method was chosen as the method of analysis in the study. The reason why this method is preferred is, even under weak assumptions making it possible to achieve strong and consistent coefficients and offering strong assumptions depending on consistency estimators. The coefficients obtained by Taylor rule analysis shows that only the inflationary response coefficient is effective in the central bank's policy decisions. Output deficit and exchange rate openness coefficient is not as effective as inflationary response coefficient in policy decisions. Findings obtained from the study are supportive of the studies in the literatüre. That mentioned rule is lead to be valid on economies with a lower rate of inflation and steady growth rates.