The study stresses that the CBT does not have at its disposal appropriate tools to fulfill the objectives assumed in the late 2010 with the new monetary policy framework.

How to design a monetary policy that focuses both on financial stability and price stability? Monetary economists and central bankers all around the world have been endeavoring to answer this question lately. The June issue of the journal İktisat İşletme ve Finans – Economics, Business and Finance covers studies that seek to answer this question. The studies covered in the journal assess the new monetary policy framework of the Central Bank of Turkey (CBT) with this perspective. On Tuesday, I talked about two out of five studies in the issue. Today I want to summarize the rest. 

Institutional arrangements
I authored the third study in the June issue: ‘An Exploration into New Monetary Policy’. With monetary authorities assuming more than one policy objective and the impacts of monetary policy changes not becoming visible immediately but being extended over time, to employ more than one policy tool becomes a possible option for monetary authorities. The study discusses possible outcomes of having more than one monetary policy tool. Three problems are highlighted with this respect: Which tools to use?  Which inflation targeting model to employ? What institutional arrangement is necessary to ensure coordination between different agencies authorized to use different policy tools? The article focuses mainly on the third question. It first addresses the challenges facing the new monetary policy framework introduced in the late 2010. In the light of Turkey’s experience with the new policy framework, it proposes possible institutional arrangements.

The fourth study is by Yıldız Akkaya and Refet Gürkaynak: “Current Account Deficit, Budget Balance, Financial Stability, and Monetary Policy: Reflections on a Gripping Episode” The main argument of the authors is that institutions that have a certain mandate must have appropriate policy tools at their disposal to achieve that mandate. The study evaluates the post-2001 period in Turkey focusing on two sub-periods: the 2002-2006 period marked by a strong stability program and the resultant process of “normalization” and the 2007-2012 period characterized by distinct problems that the existing institutional structure was not able to respond. The study points at the absence of a coherent economic policy in this second sub-period. It stresses that the CBT does not have at its disposal appropriate tools to fulfill the objectives assumed in the late 2010. Therefore, the study argues, that the new monetary policy framework of the CBT creates a significant cost for Bank as well as for the Turkish economy. 

The role of the BRSA
The last study by Cevdet Akçay and Eren Ocakverdi is titled “An Interim Assessment of the Ongoing Turkish Monetary and Macroprudential Experiment.” The study first argues why focusing solely on price stability is insufficient in the post-crisis era. Then, it evaluates the new monetary policy the CBT announced at the end of 2010.  At the first glance, the policy proved relatively unsuccessful until the Banking Regulation and Supervision Agency (BRSA) stepped up in mid-2011, the study suggests. It stresses that the temporary failure of the policy was influenced by banks’ efforts to increase their share in the credit market as well as the picture created by the circles that oppose to the unconventional monetary policy framework. As it matured, the new policy framework started to achieve the objectives of limiting the pace of credit growth and reducing the current account deficit, the study claims. Also, it stresses that if the credit growth can be kept under control, a more sustainable current account deficit regime can be implemented.

This commentary was published in Radikal daily on 07.06.2012