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Inflation Targeting Performance and Challenges for the Central Bankof the Republic of Turkey: 

Inflation Targeting Performance and Challenges for the Central Bank of the Republic of Turkey Summary Prepared by: Hristina Bencheva Jose Quinonez Phuong Hoang Doug Soung

Where is Turkey? : 

Where is Turkey? —on the crossroad of Europe, Asia and Africa

Map of Turkey: 

Map of Turkey Southeastern Europe and Southwestern Asia (that portion of Turkey west of the Bosporus is geographically part of Europe), bordering the Black Sea, between Bulgaria and Georgia, and bordering the Aegean Sea and the Mediterranean Sea, between Greece and Syria

A Cultural export—the belly dance: 

A Cultural export—the belly dance

Definition of Turkish Inflation Targeting Regime: 

Definition of Turkish Inflation Targeting Regime “Owing to the advantage of being easily understood by the public, as well as its communication advantage, the inflation target was set as “a point target”. As it is an indicator easily followed by all members of society and an effective way of accurately measuring the cost of daily life, the Consumer Price Index was the preferred means of defining the inflation target.” Inflation Forecasting Targeting

Historic Development: 

Historic Development History of hyperinflation—three decades From Fiscal indicator targeting (public stock debt) to Monetary targeting (monetary base and inflation) Floating exchange rate Reverse dollarization and denomination of the Turkish Lira Structural adjustment program for full EU membership Institutionalization of monetary policy—Monetary Policy Committee, Turkish Statistical Agency From Implicit Inflation targeting (2001-2005) towards Inflation targeting regime (2006)

Turkish Central Bank formal organization: 

Turkish Central Bank formal organization

Central Bank Policy instruments: 

Central Bank Policy instruments Open Market Operations Discount lending Protect and influence the FX rate of the Turkish Lira Set banks reserve requirements Manage gold and Exchange reserves Overlook Financial and FX markets Financial Advisor, fiscal agent & treasurer of the government

Implementation of Policies: 

Implementation of Policies Independency--from complete government control—from “advisor” to “decision-maker” Transparency—announce inflation targets—prompt communication with the public and government about intended policies and outcomes Accountability—commitment to the target and responsibility for any harsh deviations from it. Predictability of Monetary policy

Framework of Inflation Targeting Regime: 

Framework of Inflation Targeting Regime Main Variable of Targeting—end-year rate of inflation Uncertainty Band– indicator for the permissible deviations from the target (government and public accountability) Main Statistical Index—CPI base year 2003 (current term) Targeting Period—Medium term perspective, minimize exogenous shocks (3 year period) React to permanent (secondary effects) not to temporary (primary effects) Sharp, long-term deviations—change the target Temporary, seasonal deviations—change the forecast

Past Target, Realization and Future Projections: 

Past Target, Realization and Future Projections

Monetary Policy Conditions: 

Monetary Policy Conditions Fiscal Discipline of Public sector Long-term expectations Prices of public goods and services Income policy Public spending IMF Negotiations and Conditionality—IMF Program Requirements Performance criteria for Monetary Base replaced with “Inflation Consultation criteria”:

Results: 

Results Contained inflation and decrease effects of inflationary pressures (excess demand, supply shortage) Increased productivity and decreased unit-labor costs Financial market deepening Stable YTL exchange rate Increased exports and competitiveness and the foreign markets Increased domestic and foreign investments (FDI) General optimism about the future of economic activity Monetary policy creates certainty, predictability, stability, optimism

Results in Figures: 

Results in Figures RGNP growth—8 % for the past 3 years and reached 10 % in 2004 (2.3 % between 1995-2001) Inflation rate reduction—from 70 % (2001-2002) to 8 % (2005) Fiscal discipline—surplus—7 % of GNP (above the 6.5 % target), public debt/GNP ratio —fallen with 30 %

Feedback: 

Feedback “The success of counter-inflationary policy has been exceptional, and has surpassed expectations. The skillful implementation of monetary policy by the Central Bank has, of course, been crucial… a continuing decline in inflation remains a central objective of policy. The independence of the central bank has certainly been important in maintaining downward pressure on the inflation rate, and will continue to be so…This will help Turkey converge with the European Union. More importantly, it will benefit all of Turkey's citizens. ” Anne O. Krueger First Deputy Managing Director International Monetary Fund May 6, 2005