Taylor Rule: Testing the asymmetric effects for Turkey

The Central Bank of Republic of Turkey (CBRT) has demonstrated a monetary stance which focuses on price stability in monetary policy board decisions. In this context, the interest rate is utilized as the most important policy tool in determining monetary policy. After 2010, the Central Bank has adopted a policy approach that takes into account financial stability in addition to its objective of price stability. It is important to determine the variables that affect the interest rate as it is the most important instrument used in policymaking. In this study, whether the effects of inflation and the output gap on the interest rate are symmetric or asymmetric are examined within the Taylor Rule framework for Turkey. In the first chapter, the general framework, aim and importance of the research topic are discussed. In the second chapter, monetary policy and the applications of monetary policies in Turkey are considered. In the third chapter of the study, the Taylor Rule is presented in general terms, and in the fourth chapter linear and nonlinear approaches are discussed. In the latter section, in addition to linear unit root and cointegration tests which are frequently used in the literature, nonlinear models and cointegration tests are also examined. In the following sections, the effects of inflation and the output gap on the policy interest rate are tested within the Taylor Rule framework by both the linear and nonlinear ARDL approaches. In the linear model, while inflation is found to be significant, the output gap is not. In the nonlinear ARDL model, the positive and negative effects of both inflation and output gap are significant. It is concluded that the effects of inflation and the output gap on the interest rate in the long run are asymmetric, that is, the effects of the increases and decreases in these variables on interest rates are different. Similarly, the short run effects of inflation and the output gap on interest rates are also asymmetric.