Impact of inflatıon gap to nomınal interest rates: case of Turkey

The objective of this paper is to examine the impact of inflation gap from target, deviation from targeted inflation, to nominal interest rate decision of Central Bank of Republic of Turkey (CBRT) in Turkey. Recently, ıt is discussed whether inflation target (IT) regime is the only method to achieve price stability goal or not in Turkey. Becasue the average inflation rate in Turkey during 1980-2002 is over 70 percent, Turkey has not become a potential candidate for IT regime. CBRT has begun to implement IT regime explicitly as late as after january 2006, when the country could able to reduce its inflation rate below 30 percent between 2002 and 2005. We apply unrestricted standard Vector Autoregressive (VAR) technique to series between 2002-2011, because it is known that CBRT has implemented IT implicitly betwen 2002-2005 and explicitly after 2006. Empirical findings indicates that the impact of inflation gap, deviated from targeted inflation, to nominal interest rate is insignificant. Therefore, we suggest that CBRT has implemented its implicit and explicit inflation targeting regime by discretionary measures not by policy rules during 2002-2011. This paper also finds that output gap is negatively and significantly related to the inflastion gap. If CBRT deviates 1 unit from its inflation target level, the logarithmic difference of output gap reduces 0.004.