Determination of effective target indices in the inflation targeting regime in Türki̇ye

Inflation Targeting, implemented by New Zealand in the early 1990s, is an important monetary policy regime used to ensure price stability. The selection of the price index is important in the inflation targeting strategy. When the countries that implement the inflation targeting regime are examined, it is seen that they use the Consumer Price Index (CPI) or a part of CPI, which is Core Inflation used. In the study, it was possible to compare the index including the items subject to temporary effects and sudden shocks; and the aforementioned adjusted index. By comparing the core inflation and CPI rates for the period 2004:01-2022:08, covering the period in which the inflation targeting strategy is implemented, it possible to determine which index is suitable for the inflation targeting of the Central Bank. In the study, the Turkish economy, which is an economy that implements the inflation targeting strategy, is evaluated within the framework of the applied monetary policy. Alternative inflation rates have been tested through the Taylor-type policy reaction function in terms of the discussion of which type of inflation should be taken into account in implicit and explicit inflation targeting practices that have been implemented since 2002. When the results of the study and the discussions about which inflation calculation should be taken into account are evaluated for Türkiye, it is possible to say that core inflation is more appropriate. The coefficients of both inflation types are evaluated from the results obtained, it is seen that the core inflation responds to the policy interest rate higher and more meaningfully. On the other hand, it can be said that headline inflation is less affected by changes in policy interest rates. In addition, the exchange rate coefficient was high in the model established for headline inflation. The reason for this is the effect of the exchange rate, especially in countries that supply energy from abroad, such as Türkiye. This is another reason to use the core inflation rate in inflation targeting.