Adverse Consequences of Turkey's Ever‐Weakening Monetary Policy

ABSTRACT

This study examines the evolution of Turkey's monetary policy during the period from Turkey's implementation of an implicit inflation‐targeting regime in 2002 to Turkey's last presidential election in May 2023. Unlike previous studies, this study found insignificant evidence for a weakening in Turkey's monetary policy during the 2010s. However, the tug‐of‐war between government officials and the central bank over a rise in short‐term interest rates seems to have resulted in a significant violation of Taylor's principle in the post‐COVID period. Turkey's ever‐weakening monetary policy during the COVID period marks a divergence from monetary policy in other emerging market economies ( EME s). This study shows that such a lax monetary policy has had two major adverse consequences. First, Turkey had one of the highest inflation rates in the world owing to its excessively loose monetary policy stance. Second, Turkey's borrowing terms on dollar‐denominated external debt worsened relative to those of other EME s.