A TEST FOR ASYMMETRIC CENTRAL BANK PREFERENCES IN TURKEY

Year 2011, Volume: 3 Issue: 2, 179 - 191, 01.12.2011

Ertuğrul Üstün Geyik

Abstract

The time inconsistency based KPBG models that tried to explain the inflation bias lost their popularity as inconsistent Central Bank behaviors changed in time. However, high inflation for countries like Turkey is still a problem and a new theory to explain this ‘time consistent’ inflation bias is in need. A theory based on non-linear or asymmetric Central Bank behavior is developed during the last decade to fill this gap. One way to test the empirical validity of the theorem is based on a Taylor Rule variant asymmetric model. This model is tested here for Turkey as it is one of the inflation targeting countries roughly for the last ten years

Keywords

asymmetric preferences, inflation bias, policy targets, central bank

References

• Barro, R.J. and D.B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary policy", Journal of Monetary Economics, Elsevier, v.12(1), 101-121. Bec, F., B.M. Salem, and F.Collard. 2002. “Asymmetries in Monetary Policy Reaction Function: Evidence for US, French and German Central Banks,” Studies in Nonlinear Dynamics and Econometrics, 6, # 2, Article 3.
• Blinder, A.S. 1998. Central Banking in Theory and Practice. Cambridge MA: The MIT Press.
• Clarida, R., Gali, J. and M. Gertler, 1998. “Monetary policy rules in practice: Some international evidence,” European Economic Review v.42, p.1033–1067.
• Cukierman, A., 2000. “Establishing a reputation for dependability by means of inflation targets”, Economics of Governance v.1, 53–76.
• Cukierman, A. and A.Muscatelli, 2008. “Nonlinearities in Taylor rules and asymmetric preferences in central banking: evidence from the UK and the US”, The
• http://www.bepress.com/bejm/vol8/iss1/art7 of Macroeconomics 8, Paper
• Davradakis, E. and M.P. Taylor, 2006. “Interest Rate Setting and Inflation Targeting: Evidence of a Nonlinear Taylor Rule for the United Kingdom”, Studies in Nonlinear Dynamics & Econometrics v.10(4), Article 1.
• Dolado, J., Maria-Dolores, R., and F. Ruge-Murcia, 2004. “Non-Linear Monetary Policy Rules: Some New Evidence for the US,” Studies in Nonlinear Dynamics and Econometrics, 8, # 2, Article 2.
• Florio,M., 2009. "The American Crisis: Travel Notes," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, v.2, May.
• Gredig, F., 2007. "Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile," Working Papers Central Bank of Chile 451, Central Bank of Chile.
• Hammond, G, 2011. “State of the Art Inflation Targeting-2011”, Handbook No.29, Bank of England.
• Hodrick, R., and E.P. Prescott, 1997. “Postwar Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking, 29, 1–16.
• Horváth R., 2009. “Asymmetric Monetary Policy in the Czech Republic?”, in Evaluation of the Fulfillment of the CNB's Inflation Targets 1998-2007, 117-130. Czech National Bank, Prague.
• Ireland, Peter N, 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?". Journal of Monetary Economics: Elsevier. v.44(2) p.279-291.
• Kydland, F., E. C. Prescott, 1977. "Rules Rather than Discretion: The Inconsistency of Optimal Plans". Journal of Political Economy. v.85(3), p.473– 492.
• McCallum, B.T, 1995. “Two Fallacies Concerning Central Bank Independence”. American Economic Review, Papers and Proceedings. v.85, p.207-211.
• McCallum, B.T, 1997. “Crucial issues concerning central bank independence”. Journal of Monetary Economics v.39. p.99-112.
• Ruge-Murcia, F.,2003. “Inflation Targeting Under Asymmetric Preferences”, Journal of Money Credit, and Banking, 35, 763–785.
• Saadon, Y., Ben David N., Benzion U. and Z. Shiffer, 2008. “Asymmetric Preferences and the Central Bank's Interest Rate”, Journal of Money, Investment and Banking, (5), 67-84.
• Sarikaya Ç, F.Öğünç, D.Ece, H.Kara and Ü.Özlale, 2005. "Estimating Output Gap for the Turkish Economy," Working Papers 0503, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
• Surico, P., 2006. “The Fed’s monetary policy rule and U.S. inflation: The case of asymmetric preferences”, Journal of Economic Dynamics and Control, 31, 305– 324.