Abstract:

(Openness and Effectiveness of Monetary Policy: Evidence from Turkey) Economic theory predicts that the ability of monetary policy to increase output decreases, while in-flation increases with open economy. In this study, these predictions are retested over the open econ-omy of Turkey for annual data from 1950 to 2003 to see how the theoretical predictions are consistent with this paper’s empirical results. The paper’s empirical results support the theoretical predictions that the more open an economy is the smaller the output effects of a given change in the money supply. Ordinary Least Squares (OLS) is used in order to identify which variables determine the rate of growth of real GDP. Firstly, it has been found that increases in real oil prices negatively affect real GDP, also, the growth rate of real money supply affects GDP negatively, but this effect is not statististically signifi-cant. Then, the lags of real money supply and openness have been added to the model and the coeffi-cient of openness is negative, but statistically significant. Also, in order to identify the determinants of inflation rate, the OLS has been used in this paper. In sum, as expected in the theory, it has been found that only the rate of growth of money supply affects inflation rate.

Keywords: