Inflation Targeting Performance and Challenges for the Central Bank of the Republic of Turkey

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Inflation Targeting Performance and Challenges
for the Central Bankof the Republic of Turkey

• Summary

Prepared by Hristina Bencheva Jose
Quinonez Phuong Hoang Doug Soung
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Where is Turkey?

• on the crossroad of Europe, Asia and Africa

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Map of Turkey

• Southeastern Europe and Southwestern Asia (that
  portion of Turkey west of the Bosporus is
  geographically part of Europe), bordering the
  Black Sea, between Bulgaria and Georgia, and
  bordering the Aegean Sea and the Mediterranean
  Sea, between Greece and Syria

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A Cultural exportthe belly dance
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Definition of Turkish Inflation Targeting Regime

• Owing to the advantage of being easily
  understood by the public, as well as its
  communication advantage, the inflation target was
  set as a point target. As it is an indicator
  easily followed by all members of society and an
  effective way of accurately measuring the cost of
  daily life, the Consumer Price Index was the
  preferred means of defining the inflation
  target.
• Inflation Forecasting Targeting

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Historic Development

• History of hyperinflationthree decades
• From Fiscal indicator targeting (public stock
  debt) to Monetary targeting (monetary base and
  inflation)
• Floating exchange rate
• Reverse dollarization and denomination of the
  Turkish Lira
• Structural adjustment program for full EU
  membership
• Institutionalization of monetary policyMonetary
  Policy Committee, Turkish Statistical Agency
• From Implicit Inflation targeting (2001-2005)
  towards Inflation targeting regime (2006)

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Turkish Central Bank formal organization
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Central Bank Policy instruments

• Open Market Operations
• Discount lending
• Protect and influence the FX rate of the Turkish
  Lira
• Set banks reserve requirements
• Manage gold and Exchange reserves
• Overlook Financial and FX markets
• Financial Advisor, fiscal agent treasurer of
  the government

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Implementation of Policies

• Independency--from complete government
  controlfrom advisor to decision-maker
• Transparencyannounce inflation targetsprompt
  communication with the public and government
  about intended policies and outcomes
• Accountabilitycommitment to the target and
  responsibility for any harsh deviations from it.
• Predictability of Monetary policy

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Framework of Inflation Targeting Regime

• Main Variable of Targetingend-year rate of
  inflation
• Uncertainty Band indicator for the permissible
  deviations from the target (government and public
  accountability)
• Main Statistical IndexCPI base year 2003
  (current term)
• Targeting PeriodMedium term perspective,
  minimize exogenous shocks (3 year period)
• React to permanent (secondary effects) not to
  temporary (primary effects)
• Sharp, long-term deviationschange the target
• Temporary, seasonal deviationschange the
  forecast

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Past Target, Realization and Future Projections
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Monetary Policy Conditions

• Fiscal Discipline of Public sector
• Long-term expectations
• Prices of public goods and services
• Income policy
• Public spending
• IMF Negotiations and ConditionalityIMF Program
  Requirements
• Performance criteria for Monetary Base replaced
  with Inflation Consultation criteria

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Results

• Contained inflation and decrease effects of
  inflationary pressures (excess demand, supply
  shortage)
• Increased productivity and decreased unit-labor
  costs
• Financial market deepening
• Stable YTL exchange rate
• Increased exports and competitiveness and the
  foreign markets
• Increased domestic and foreign investments (FDI)
• General optimism about the future of economic
  activity
• Monetary policy creates certainty,
  predictability, stability, optimism

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Results in Figures

• RGNP growth8 for the past 3 years and reached
  10 in 2004 (2.3 between 1995-2001)
• Inflation rate reductionfrom 70 (2001-2002) to
  8 (2005)
• Fiscal disciplinesurplus7 of GNP (above the
  6.5 target), public debt/GNP ratio fallen with
  30

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Feedback

• The success of counter-inflationary policy has
  been exceptional, and has surpassed expectations.
  The skillful implementation of monetary policy by
  the Central Bank has, of course, been crucial a
  continuing decline in inflation remains a central
  objective of policy. The independence of the
  central bank has certainly been important in
  maintaining downward pressure on the inflation
  rate, and will continue to be soThis will help
  Turkey converge with the European Union. More
  importantly, it will benefit all of Turkey's
  citizens.
• Anne O. KruegerFirst Deputy Managing
  DirectorInternational Monetary FundMay 6, 2005