Abstract:

One of the main objectives of central banks is to ensure monetary stability. The fight against inflation is an important place in this goal. In particular, central banks that are going to target inflation use interest rates as the main tool. Thus, they decide how much they will change their interest rates in accordance with the goal they set. According to the Taylor Rule, when deciding how much central banks will change the interest rate, the gap between the potential non-clean domestic earnings (GDP) and the occurring non-profit domestic earnings and the target inflation and the occurring inflation rate must change in the same direction. In this study, the best monetary policy was tried to determine for the period 2004:01-2016:10 under the Taylor Rule where the currency rate, inflation and production variables were determined on the basis of the rule.  Taylor's Rules of Interest rates were analyzed in the framework of two models, the model in which he determined the interest rates based on the production gap and the inflation gap, and the model in which the central bank, which is a kind of open economy version, determined the interest rates based on the production gap, the inflation gap and the currency gap. For both models created according to the econometric results of the border test, the conclusion was achieved that Taylor's rule worked for the Turkish economy. In other words, it is easy to say that the interest rate is operating according to a certain rule.