Monetary policy in Turkey: current approach, effectiveness, and challenges ahead

Starting from the observation that Turkey has followed an increasingly divergent path compared to other emerging economies with high inflation and accelerating depreciation of its currency, this master’s thesis investigates the factors that may account for Turkey’s peculiar fate. To this aim, this thesis sets the scene by tracing the macroeconomic evolution of Turkey since the 2001 financial crisis before moving to a discussion of the potential scope, limitations and officially stated objectives of monetary policy in Turkey. An extensive literature review subsequently depicts the monetary policy conducted by the Central Bank of the Republic of Turkey (CBRT) since 2001. Overall, the evidence gathered in this theoretical part suggests that institutional factors have progressively disrupted monetary policy and ultimately led to the CBRT’s outright political takeover. The empirical part which comes next provides additional evidence that institutional factors have exerted a major influence on economic outcomes through an event analysis and a comparative assessment of several institutional quality indicators. Finally, the main contribution of this paper lies in the estimation of various Taylor-type policy rules for the CBRT which provide evidence of the dismal effects of political interference on inflation and exchange rates.