Effectiveness of Inflation Targeting in Turkey

Abstract

Inflation rate targeting (IT) has recently become a popular monetary policy tool to fight inflation, in advanced as well as emerging market economies, by curtailing inflationary expectations. The evidence of IT's role in anchoring expectations is mixed. In this paper, the authors quantitatively examine IT's effectiveness in reducing Turkish inflation by comparing forecasted inflation to actual inflation. Furthermore, the possibility of a structural change following IT is examined. The authors show that observed levels of inflation would not have been any different from the forecasted ones if IT had not been adopted. They also fail to find a structural break in inflation at the time of the adoption of IT and conjecture that this might be due to the public's earlier belief that the central bank's policy would not be inflationary.