The interaction among interest rate, inflation and output in inflation targeting regimes: The case of turkey

Abstract

Inflation targeting (IT) as a framework for monetary policy was first adopted in the early 1990s by some developed countries. However, since the late 1990s, it has been adopted in a number of emerging market and developing countries, especially some new members of the European Union. This paper examines the interaction among interest rate, inflation and output in inflation targeting regimes in Turkey and the findings will help us to understand why and how the inflation targeting, as a new monetary policy regime, has become a succesful one among the alternative monetary regimes. There are many empirical studies on the effectiveness of inflation targeting regime for Turkey, and our study which is about Turkey’s inflation targeting experience may provide some contribution to the other studies. Through the empirical analysis in this study, it is found out that there is a long term relationship among inflation, interest rate and production, by the way, in Turkey, inflation rate is significantly affected by the changes in interest rate and production together.