Can Inflation Targeting Regimes Be Effective in Developing Countries? The Turkish Experience

In 2002, the the Central Bank of Turkey (CBT) shifted to an implicit inflation targeting framework (IIT) that encompassed the most of core attributes of an official IT regime. Successful disinflation and progress in the policy environment led to the introduction of full-fledged IT in 2006 that brought further transparency to the monetary policy framework. We found Turkey's new monetary approach to be an effective framework with more progress to come. Our judgment is based on three broad conclusions pointed at by empirical analyses. First, fiscal stability is an effective tool for a successful monetary policy. Second, the CBT's overnight policy rate is a significant determinant of the changes in market lending rates, which is the preliminary step in the monetary transmission mechanism. Third, recent developments on the broader issue of the effectiveness of interest rate policy in controlling inflation through aggregate demand management and through other channels is encouraging. Based on our findings, we can argue that the impact of policy rate changes on economic activity and inflation have become more predictable and changed in the direction in line with theory, improving the transmission capacity of monetary policy