Abstract:

Although the 2008 global financial crisis has radically changed monetary policies, it is seen that the Taylor Rule still has a wide place in practice. The aim of this study is to examine the reaction function of the Central Bank of the Republic of Turkey for two sub-periods with the extended Taylor Rule model. In this way, it is determined how sensitive the monetary policy in Turkey has changed in the post-crisis period to which macroeconomic variables. For this purpose, monetary policy for the period 2011:04-2019:07 was modeled with the extended Taylor Rule and estimated with the linear Vector Autoregressive (VAR) method. In the analysis, it is divided into two sub-periods according to the CBRT presidents. The period between 2011:04-2016:03 represents Erdem Basci, and the period between 2016:04-2019:07 represents the period of Murat Cetinkaya. The data used in the econometric analysis are the CBRT weighted average funding cost, inflation rate, industrial production index and USD/TL exchange rate. According to the impulse response analysis, the main findings are that the CBRT reacts increasingly to a shock in the exchange rate in both periods, but does not react to a shock in the industrial production index. The severity of the shocks differed in the two sub-periods. In the Cetinkaya period, the interest rate reacted more severely to the fluctuations in the exchange rate compared to the Basci period. Variance decomposition also supports this result. In the Cetinkaya period, the share of the exchange rate in the variance of the interest rate is higher. As a result, the reaction function reacts differently to different variables in both sub-periods. The study will provide policy recommendations by looking at the impulse response analyzes in the sub-period.

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