Abstract:

The aim of this study is to develop an index-based alternative method in order to measure the CBRT’s credibility. Unlike the previous studies, the original contribution of the method developed in the study is revealed in two points: (i) Inflation targets, which cannot be achieved for a long time, lose the function of anchoring inflation expectations. In this case, developing countries’ central banks prefer to use their own inflation forecasts as an intermediate target in order to manage inflation expectation of private economic agents. Because of this situation, which is also observed in the Turkish economy, the reliability of credibility indices calculated using only the inflation target is open to debate. Therefore, while developing an alternative central bank credibility index in this study, the year-end inflation forecast in the first inflation report of the relevant year besides the central bank’s inflation target are taken into account. (ii) In economies that experience high inflation and/or where inflation exhibits inertia, as using 20% threshold level for the inflation rate like in the previous studies means giving more tolerance to inflation. However, after the CBRT switched to an inflation targeting strategy, the inflation rate fell to single digits, and double-digit inflation rates were considered as a negative psychological level in terms of inflation dynamics. By taking account this situation, in this study, 10% threshold level for the inflation rate is decided to use. Consequently, since the central bank credibility index developed in the study has a more dynamic structure, it is seemed to better explain the CBRT’s credibility level.

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