In recent years, central banks are willing to determine monetary policy strategies according to a rule introduced by policy makers instead of discretionary policy decisions. The easiest way of increasing predictability of policies practiced by central banks is to practice policy according to a simple rule developed by policy makers. Increasing predictability of monetary policy gives chance to households to guarantee themselves in the case of policy surprises and reduces social cost of monetary policy applications. An optimal policy rule may depends on complex models. But complex models can complicate solution of problems caused by discreationary policies. Because all the important information needed for complex rules can not be collected by households. In this respect, simple rules like Taylor rule is easy to understand and to apply. But original policy reaction function constructed by Taylor (1993) does not include exchange rate. In this study, Taylor rule is extended by implicating exchange rate into policy reaction function. By doing so, Taylor rule which is valid for some developed countries is investigated for the Turkish economy and validity of the rule is tested. Unlike the existing literature, validity of Taylor rule in the Turkish economy is analysed by modelling according to different type of interest rates. With this aim, monthly data belonging to the Turkish economy including years between 1986:5 and 2010:9 is used and VAR methodology is employed. At the end of the analysis, results imply that although it is not valid for all three interest rate types, interest rates move in the context of Taylor rule in general. Also, results of Taylor type reaction function based on discount rate of the CBRT used as monetary policy tool is more useful and policy makers have to take the rule into consideration in policymaking decisions.
Alan : Sosyal, Beşeri ve İdari Bilimler
Dergi Türü : Uluslararası
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