Since the dismissal of Murat Çetinkaya, Governor of Turkey’s Central Bank, in the beginning of July, 2019, there has been robust debate on the issue of Turkey’s interest rates. There was a clear difference of opinion between the government and the former central bank governor on the appropriate level of interest rate. In an attempt to support Turkish Lira, Çetinkaya gradually increased the central bank’s benchmark interest rate, in total 11.25 percent, last year fixing it to 24 percent. He was criticized on several occasions by President Erdogan for keeping the interest rates high. 

After the appointment of the new governor Murat Uysal, the previous deputy to Çetinkaya, many expected a rate cut. Uysal gave the first signal in that direction in his interview with Anadolu Agency on July 15.

Uysal’s decision for a rate cut came this Thursday when the central bank announced a drop in interest rates from 24 percent to 19.75 percent. For some analysts, the rate cut went beyond expectations. Thus, The New Turkey asked two experts of Medipol University, Prof. Nurullah Gür and Prof. Mevlüt Tatlıyer for their opinions on the recent rate cut decision.

Prof. Gür told The New Turkey that “most analysts had expected a 250 basis points cut on average. But there were also some market players who expected that the central bank might reduce its policy interest rate by up to 400 basis points. Therefore, although the central bank reduced one-week repo rate more than market expectations, it did not cause a shock effect.”

Prof. Gür further commented that “after examining the bank’s statement regarding its monetary policy change, it can be said that three factors come to the fore as the cause of the aggressive interest rate decrease. First, the downward trend in inflation has become more pronounced as unprocessed food and energy prices declined, and thus the central bank expects that ‘inflation is likely to materialize slightly below the projections of the April Inflation Report by the end of the year.’ Second, the global economic environment provided the central bank more space for an aggressive rate cut. As global economic activity weakens, all major central banks including the Fed and the ECB, are signaling a loose monetary policy. Third, some macroeconomic data on Turkish economy indicate ‘a moderate recovery in the economic activity’. This moderate recovery is fueled by export and tourism revenues. Domestic demand is still weak. So, the central bank expects that this type of a recovery will not trigger inflation.”

Prof. Tatlıyer told the The New Turkey that “to the astonishment of many, the central bank slashed the policy interest rate by 425 points to 19.75 percent in the July meeting. This is the biggest interest-rate cut since 2002, when it adopted an inflation targeting regime. However, this is also a very late move, since the central bank did not decrease the policy interest rate even once as the inflation rate gradually decreased to as low as 15.7 percent as of June 2019 from its peak of 25.2 in October 2018. The Turkish ex-ante real interest rate, thereby, increased gradually from 2.4 to 5.4 percent between November 2018 and May 2019 with an average of 4.3 percent.  In June 2019, it skyrocketed to an astonishing 8.1 percent. Before June, Turkey already ranked first in the world in terms of ex-ante real interest rates. So, a dramatic rate cut was imminent this month. With the latest move of the central bank, the ex-ante real interest rate happened to decrease less than 150 percentage points from 5.4 to 4.0 percent between May and June 2019. So, that Turkish Lira gained value against the US dollar after the record-breaking rate cut is not surprising at all.”

Since the onset of the global economic crisis political, economic and technological competition among the global and emerging powers acquired increased pace and tenacity. While the U.S., Russia and China experience geo-political tensions with increasing frequency and face the possibility of direct confrontation beyond proxy-wars; liberal economics and free trade approaches rapidly lose their proponents in the world economy.

The political backing behind the liberal international trading system represented by institutions such as the World Trade Organization is fading, while neo-protectionism gains ground along with rising economic nationalism. Triggered by the Trump administration in the U.S. and the rising tide of nationalist/neo-populist parties in Europe and elsewhere, trade wars, currency wars, cyber-space wars, economic sanctions and accusations of technological theft are also increasing.

A fierce conflict for sustained global economic hegemony, or to use Organski’s words, to prevent a “power transition,” openly takes place between the U.S. and China. All these developments constitute crucial challenges for the political and economic authorities of emerging powers and developing countries. There is an ever-increasing pressure on decision-making communities in these countries to monitor global developments closely and formulate effective and timely responses.

Managing the Turkish economy under presidential system

Turkey is heading for a systemic transformation towards the “Presidential Government System” under such difficult global conditions. But it is exactly these difficult conditions that make Turkey’s systemic transition more important and inevitable. As such, the systemic reform that will take place in Turkey following the June 24 elections shall be conceptualized not only as a legal and political reform that will restructure the separation of powers among the executive, judiciary and the legislative branches of the government. On the contrary, it should be construed as a structural reform that would transform the macroeconomic governance architecture and socio-economic development strategy with comprehensive institutional changes.

While embarking on major institutional reform in macroeconomic governance, there are several common features that need to be taken into account from the successful development experiences across the globe:

1. Strong political leadership that supports politico-economic stability and the autonomy of key institutions formulating long-term development policies with a clear division of labor.
2. A highly qualified, professional, meritocratic, practical, fast-acting, problem-solving bureaucracy controlled by “pilot organizations” with strong channels of communication with political and economic actors.
3. A dynamic, open-minded and innovative private sector that shares common interest with the politico-bureaucratic elite as to the long-term development goals of the country and focuses on vibrant sectorial competition strategies with a global view.
4. A dynamic social structure that allows vertical mobilization through a high-quality education system, participatory institutions and structured collaboration among political, bureaucratic and market actors.

Therefore, Turkey’s initiative for institutional reform shall proceed in a way to enable smooth progress on all these accounts. When we look at the historical record of previous AK Party governments for institutional reform, it is clear that significant reforms were made to institutionalize a “regulatory state” in the first decade of the 2000s. Consequently, fiscal discipline was permanently established and the financial structure became resilient against severe international shocks.

Several institutional reforms in line with the “Post-Washington Consensus” style of prudent financial and macroeconomic regulation were successfully accomplished. Instrumental independence of the Central Bank to conduct monetary policy and autonomy of key regulatory agencies responsible for the supervision of regulation of finance, capital markets and other services were secured. This robust regulatory framework was extremely effective in constraining the negative repercussions of the global economic crisis on Turkey.

But there was one major structural problem with the overall macroeconomic management approach in that it favored the inflow of international funds to sponsor the booming construction, finance and service industries; rather than industrial production and technological know-how.

Over the course of the years following the global economic crisis Turkey tried to realize a paradigmatic transition to a more production and real economy oriented growth model with no avail. In order to precipitate a transition to a more industry-technology and export oriented growth strategy various inventories and reports were prepared, sectorial goals were determined and subsidies were released. Yet the path dependency, which remained from Turkey’s stabilization program during the early 2000s with an emphasis on fiscal discipline and the service sector, could not be broken.

Social and political volatilities from the Gezi Park protests in 2013 to the failed coup on 15 July 2016 also exerted a negative impact on the projected strategic transition. As did the hesitant attitude of the AK Party leadership on taking a leading role for industrial-technological upgrading through public-private partnership schemes since these were seen contrary to the principles of economic liberalism.

When we came to 2018, the global atmosphere concerning strategic public involvement in key industries and neo-protectionism are globally accepted practices and there is a relative sea change in terms of the public-private balances in macroeconomic management. Therefore, the political leadership in Turkey has more leeway to exert strategic activism when it comes to achieving prioritized sectorial growth objectives.

Restructuring macroeconomic management

In order to follow global developments leading to the so-called Fourth Industrial Revolution, Turkey needs to radically restructure both the philosophy and institutional manifestations of macroeconomic management in order to keep up with the pace of ever-fastening global competition among global and emerging powers.

Concretely speaking, the following institutional changes could be made in the existing macroeconomic governance architecture:

1. The basic law of the Central Bank could be altered to establish a dual role for the Bank focusing on price stability (inflation control) and employment (growth) as in the case American FED and several other major central banks. This will transform the current standing of the Central Bank from a purely financial management organ to a pilot institution trying to balance price and financial stability with growth and employment objectives in the real economy.
2. The current ministerial portfolio responsible for the management of macroeconomic areas is excessively dispersed. Several ministries could be merged and some of them could be made leaner in order to increase their efficiency.
3. In this context, the current Economy Ministry, Science-Industry and Technology Ministry, and Development Ministry could be merged together to form an “Industry, Trade and Development Ministry.” This ministry could play the role of a coordinating ministry such as Japan’s METI holding the pulse of the real economy and productive sectors.
4. The fiscal and financial branches of the ministerial-bureaucratic network such as the Ministry of Finance and Treasury could be brought under the roof of a “Ministry of Finance and Treasury” so that financing development and budget management could be properly coordinated.
5. A new “Ministry for Science, Higher Education and Information” could be formed to better manage science policy in close coordination with universities and institutions responsible for high-tech infrastructure.
6. An autonomous agency that brings together academics, experts, bureaucrats and key stakeholders from civil society could be formed to monitor the institutional reform process and conduct objective impact analysis such as India’s NITI or Malaysia’s PEMANDU.
7. Sector-specific incentive schemes could be prepared to boost research and development for scientific agriculture, nanotechnology, biotechnology, optics, lasers, rocket science, high-tech materials such as carbon-fiber and renewable energy technologies. Autonomous sectorial monitoring commissions could be formed within the Office of the Presidency to follow up the efficiency of these schemes.
8. Advisory positions within the Office of the Presidency could be organized into more institutionalized offices in order to allow sectorial offices for modernization of agriculture, manufacturing industry, R&D financing, entrepreneurship, export promotion and so on.
9. These presidential offices could follow up both policy formulation and implementation processes in order to solve jurisdiction problems among different ministries and assess the efficiency of devised policies, allowing policy adaptation.

Turkey has been experiencing one of the most severe speculative attacks in its open-economy era since the beginning of May 2018. The Dollar/Turkish Lira parity, which was 4.1 on May 1, rose to 4.92 on May 23. Such a sudden surge on the currency does not reflect the reality of the Turkish economy. There is a strong economic growth performance, fueled not only by consumption expenditures, but also by investment expenditures and export. The Turkish economy created around 1,2 million new jobs in the last year. The unemployment rate is declining, albeit slowly. As in every country, Turkey also has some economic problems – the high current account deficit and double-digit inflation are two main problems of the Turkish economy. These problems are not new, plus they have not shown a significant deterioration for the last two months.

With the loss of the value of the Turkish Lira, rising food and energy prices were the main triggers of this high inflation rate. Since Turkey’s costs of imported intermediate goods and energy soar in periods when the country enters a phase of rapid growth, an increase in its current account deficit is unavoidably being experienced. Reducing the current account deficit and inflation require supply-side structural reforms. The government is aware of that. Turkish Deputy Prime Minister Mehmet Simsek tweeted: “None of Turkey’s macroeconomic problems are insurmountable. We’ve fixed problems in the past, we can do it again.” President Erdogan said that after the election serious measures will be taken without delay to reduce inflation and the current account deficit. In sum, inflation and current account deficit are not acute problems that could cause such a high jump in exchange rates in such a short time period.

So why is the Turkish Lira depreciating? Although there is no serious deterioration in economic indicators, it is obvious that there is an intense effort to worsen the economic perception as snap elections approach. The deterioration of economic perceptions is paving the way for speculative attacks that cause a surge in exchange rates. The international economic press is circulating news suggesting that the Turkish economy is overheating. In addition to this, international media outlets misinterpreted the statements regarding the future of economic management, which President Erdogan had made in interviews during his London visit.

Many economists and analysts claimed that Turkey is moving away from a free-market economy. This is a cock-and-bull story. But this type of distortional or fabricated news made financial investors anxious. The Turkish Lira depreciated with speculative movements. Following, some foreign investors began to sell their Turkish Lira assets even more to offset the loss. When Turkish companies, which have foreign currency-denominated debt, started to buy foreign currencies, the Turkish Lira depreciated even further.

After an emergency meeting, the Central Bank of the Republic of Turkey (CBRT) raised its late liquidity window rate to 16.5 percent from the previous 13.5. In the speech he made the day the Turkish Lira depreciated, President Erdogan clarified his previous statements as follows: “Turkey is a country that practices free market economy with all its rules and policies. As it is today, we will continue to adhere to global governance principles in monetary policy in the new (presidential) system.” With the statements of President Erdogan and Prime Minister Binali Yildirim, which calmed the financial markets, this rate hike prevented the Turkish Lira to depreciate further. It is not yet over. There will be further speculative attacks before the election. The current level of exchange rate is also disturbing for Turkish companies.

So, what should be done to bring the Turkish Lira to levels that reflect economic reality? First, the CBRT should be more pro-active and take more timely decisions. The last move of the central bank was late. The CBRT should have increased interest rates a week or ten days ago. Until its next meeting, which is on June 7, the CBRT should use forward guidance to steer market expectations and monitor market movements closely. If exchange rates do not loosen as expected, the CBRT should restart to fund the banking system through 1 week repo and tighten its monetary policy further.

Economic ministers should make informative and guiding explanations of the latest developments in the markets and the policy measures taken. The economic management team, including ministers, high-ranking bureaucrats and advisors, should not allow manipulative news circulation on the market by communicating with markets closely. Last but not least, all presidential candidates and political parties should explain their potential economic policies, which will be implemented with the start of the presidential system after the elections.

These are potential short-run policies and moves. In the medium and long-run, Turkey should reduce its reliance on foreign capital inflows by speeding up structural reforms (especially on imported medium- and high-tech intermediate goods, and energy resources) that can reduce its current account deficit, and by diversifying its financial instruments that can increase domestic savings and channel domestic savings to financial markets.

The Turkish private sector’s outstanding long-term loans received from abroad rose to $225.7 billion in January 2018, while short-term loans stood at $18.9 billion, according to an official report on Thursday.

The Central Bank of the Republic of Turkey (CBRT) announced that the private sector’s pending long-term loans from abroad rose $5 billion whereas short-term loans — excluding trade credits — increased by $506 million compared to the end of 2017.

By definition, short-term loans have an original maturity of one year or less while long-term loans have an original maturity of more than one year.

“As for the sectoral breakdown by the end of January, of the total long-term loans in the amount of $225.7 billion, 51.2 percent consist of liabilities of the financial institutions, whereas 48.8 percent consist of the liabilities of the non-financial institutions,” the CBRT said.

“In the same period, of the total short-term loans in the amount of $18.9 billion, 75.6 percent consist of liabilities of the financial institutions, whereas 24.4 percent consist of liabilities of the non-financial institutions,” the bank added.

Regarding the currency composition, 58 percent of the total long-term loans were U.S. dollar loans, 35.5 percent are in euros, 4.8 percent were in Turkish lira and 1.7 percent from other currencies, as noted in the report.:

“And of the total short-term loans in the amount of $18.9 billion, 46.6 percent consist of U.S. dollars, 27.7 percent consist of euros and 25.7 percent consist of Turkish lira.

“The private sector’s total outstanding loans received from abroad based on a remaining maturity basis point out to principal repayments in the amount of $71.6 billion for the next 12 months by the end of January.”

The central bank periodically releases the data for the private sector’s long and short-term loans received from abroad by gathering details from credit-based forms submitted by resident financial institutions and companies.

The bank’s next report is slated to be issued on Monday, April 16.

Source: AA

The most curious subject for the global economy for 2017 is the future of the American economy under a Trump presidency. Donald Trump is going to take charge of an economy with strong growth, rising inflation and a low unemployment rate. In the electoral period he promised to cut tax rates, increase spending on infrastructure and defense, and ease economic regulations. Considering his statements after the election and his newly established cabinet, it seems that he will strive to be a man of his word. But, of course, the actions of President Trump will be different from the promises of presidential candidate Trump. Even if Trump can do some of what he promised, his economic policies will increase both growth and inflation further.

The most curious subject for the global economy for 2017 is the future of the American economy under a Trump presidency.

In the final meeting of 2016, the Fed raised interest rates by a quarter percentage point to between 0.50% and 0.75%. The Fed forecasts three interest rate rises in 2017. The Fed will implement a tighter monetary policy to fight increasing inflation caused by Trump’s expansionary fiscal policy. But, it is not so clear whether a policy mix of expansionary fiscal policy and contractionary monetary policy will strengthen the U.S economy. This policy mix will cause the dollar to appreciate and the public debt to increase. A strong dollar will inevitably harm the export performance of the U.S. Therefore, this policy mix might increase both the trade and public deficit, exacerbating the twin-deficit problem of the U.S. So at the end of the day, it would not be so easy for the Fed to increase interest rate three times in 2017.

EU countries have not breathed a sigh of relief since the global financial crisis spread to the EU in 2010. Growth remains sluggish; unemployment is still high and some big banks cannot restore their balance sheets. To shore up growth, the European Central Bank (ECB) decided to continue its quantitative easing (QE) program until December 2017, but at a slower rate. The Fed and the ECB are using exactly the opposite policies. Therefore, the value of the dollar against the euro will continue to increase in 2017. This can give the EU a competitive edge in exports, which will bring higher growth.

EU countries have not breathed a sigh of relief since the global financial crisis spread to the EU in 2010.

It must be underlined that the effectiveness of the expansionary monetary policy of the ECB depends on the fiscal policy and the health of the banking sector. As Mario Draghi, the president of the ECB, underlined, expansionary monetary policy is not enough to revive economic growth, and thus expansionary fiscal policy should be used. So far EU countries, many of which have been using austerity policies since the global financial crisis began, are far away from using fiscal policy tools to boost growth. If expansionary monetary policy is complemented by expansionary fiscal policy, EU countries will grow faster in 2017. If not, this anaemic economic performance of the EU will continue this year.

The economic performance of EU countries also depends on the banking sector. The ECB’s negative interest rate policy is hurting Eurozone banks through profit margins. The Italian government set a 5 billion euro rescue package to bail out Monte dei Paschi Siena (MPS), which is the oldest surviving bank in the world. Although this package was adequate to rescue MPS, there is a concern that it will not be enough to stabilize the entire Italian banking system. There are some serious concerns about two big German banks as well, Deutsche Bank and Commerzbank. So, the European banking sector will be monitored carefully in 2017.

In 2017, Britain will grow faster than forecasters predicted during the referendum process.

In 2017, Britain will grow faster than forecasters predicted during the referendum process. Before the referendum many politicians, economists and analysts claimed that Brexit would cause a recession. But, so far economic indicators have shown that this is not the case. The way Britain will exit from the EU (whether it will be a soft exit or hard one) is critical for the future of the British economy. Brexit will cause headaches in some areas (e.g. the financial sector and labor market) in the short-run. But, in the long-run, Brexit can make the British economy stronger.

We should not skip China when talking about the global economy. China is still suffering from a transition from an export-led growth model to a consumption-led one. This is not an easy process. It seems that the Chinese economy will be on a more stable path this year. Parallel to 2016, it is expected that China will grow between 6-7% this year. But, it must be noted that growing debt and the shadow banking system are still two important challenges that the Chinese government should deal with.

After analyzing the global economy, let’s talk about the Turkish economy. The Turkish economy shrank in the third quarter of 2016 for the first time since 2009. This contraction occurred mostly due to the failed coup attempt and working day losses due to religious holidays. Economic growth is expected to pick up gradually in 2017. Leading indicators are showing that consumption and production recovered in the fourth quarter and the Turkish economy ended 2016 with a modest growth rate.

Monetary policy might not support economic growth in 2017. If the Fed increases interest rates aggressively, the Central Bank of the Republic of Turkey (CBRT) will have no option but to tighten monetary policy by raising interest rates. This situation is not unique to Turkey. The Fed’s interest hike and the rise in the US bond market rates are reducing the demand for emerging market assets. For this reason, emerging market central banks will increase their policy interest rates in 2017. This trend already began in November 2016.

Economists and businessmen are more optimistic about the export performance of Turkey in 2017.

In a situation where expansionary monetary policy is not on the table, expansionary fiscal policy should step in to bolster economic growth. Thanks to restructuring of the public sector, Turkey has ample space to implement expansionary fiscal policy. A low public deficit and debt strengthen the government’s grip on this issue. The government should use demand-stimulating fiscal policies and put new structural reforms into practice to restore consumer and business confidence. Increasing domestic consumption and private investments is vital to nurture economic growth.

Economists and businessmen are more optimistic about the export performance of Turkey in 2017. But, export cannot be the main driver of economic growth this year. Restoring relations with Russia, depreciation of the TL and moderate oil prices are positive signs for the current account balance. Restoring relations with Russia since the second half of 2016 will continue to increase export and tourism revenues in 2017. Although the depreciation of the TL has not caused a high increase in exports so far due to weak global trade and high dependence of Turkish export goods on imported inputs, a weak TL is suppressing import demand. OPEC agreed to cut oil production for the first time since 2008. Although this will cause an increase in oil prices, under the assumption that all members of OPEC keep their promises, market analysts do not expect a sharp increase. It is expected that oil prices will fluctuate between 55 and 65 dollars per barrel in 2017. This may cause a slight increase in the current deficit, but this effect will not be so salient.

After a tough year everyone wants to be optimistic about this year. Although there are still some uncertainties (e.g. Trump’s actions as president, the future of the EU, geopolitical risk related to the Middle East), it is expected that the global economy and the Turkish economy could fare better in 2017.

Since the fragility of the banking sector was considered to be a major cause of the crisis, policymakers gave priority to banking sector reforms. The Banking Regulation and Supervision Agency (BRSA) was mostly in charge of implementing and monitoring the banking system reforms. But, during this reform process, policymakers also worked on the functionality of the Central Bank of the Republic of Turkey (CBRT). The Central Bank Law was amended in April 2001. The primary objective of the CBRT was determined as achieving and maintaining price stability. This law fully authorized the CBRT to choose its monetary policy instruments in order to control inflation.Reducing inflation, which was 68% at the end of 2001, to single-digit levels was the top priority. After the crisis, the CRBT decided to adopt implicit inflation targeting for the period of 2002-2005. The outcome of this regime was highly successful and the CBRT achieved the reduction of inflation to single digits. This success prompted the CBRT to switch to an explicit inflation targeting regime since 2006.

The life of any successful policy is not indefinite and inflation targeting is not an exception. Therefore, it is necessary to discuss alternative policies and targets that will not only provide price stability, but also contribute to economic growth.

Thanks to the measures taken by the CBRT, the BRSA and other public institutions, the Turkish economy stood firm against the Global Financial Crisis (GFC), which shook the global economy in 2008. The CBRT used various mechanisms to support the liquidity of the financial system and revive credit markets, including lower interest rates. The CBRT has used macro-prudential policies instead of micro-prudential ones; the former have helped to immunize the side effects of the GFC.

Turkey has made important advances in its financial and monetary markets. However, there are certain areas that create vulnerabilities for the Turkish economy. As discussed above, the CBRT has adopted inflation targeting regime since 2002. At the beginning of the 2000s, Turkey’s first priority was to maintain macroeconomic stability. Reducing inflation was one of the key aspects towards achieving this. Therefore, the inflation targeting regime, which was popular across the world, was crucial in reducing inflation in a stable manner. Inflation targeting was in the forefront of the policies proposed by the neoliberal paradigm.

However, inflation targeting’s shortcomings appeared over time. Many economists, including Joseph Stiglitz and Jeffery Frankel, emphasize the failure of inflation targeting after the GFC. Although central banks have tools, such as increasing policy interest rates, to reduce demand-pull inflation, this is not the case with cost-push inflation. Central banks have limited power to affect inflation when increasing oil and/or food prices are the main reasons for soaring inflation. But, even in the case of cost-push inflation, many central banks increase their policy interest rate to achieve inflation targets. This policy not only fails to reduce inflation, but also reduces economic growth and increases unemployment.

Unfortunately, the CBRT could not achieve its inflation targets in recent years mainly due to supply shocks and to other factors that were beyond its control. The CRBT, however, continues to maintain its high interest rate policy despite the fact that it fails to keep inflation down. Although one of the main reasons for keeping interest rate very high is to prevent the excessive depreciation of the Turkish lira, the CBRT has been criticized frequently in recent times for its policy.

The life of any successful policy is not indefinite and inflation targeting is not an exception. Therefore, it is necessary to discuss alternative policies and targets that will not only provide price stability, but also contribute to economic growth.

The global economy is experiencing one of its most tumultuous periods in history. Turkey needs to move beyond this period with the minimum deviation from its medium and long-term economic goals. If Turkey can achieve this, it will be faster in catching up with developed countries. Otherwise, Turkey will have to wait longer to join the so-called “convergence club”. Of course, monetary policy alone cannot promote economic growth. Yet, we need to take economic growth into account when implementing the former.

We live in very different times now: there is intense debate about the “new normal” of global economy and the central banks of developed countries under the “extraordinary measures in extraordinary times” slogan are using unconventional monetary policies that nobody would have dared to propose ten years ago.

We live in very different times now: there is intense debate about the “new normal” of global economy and the central banks of developed countries under the “extraordinary measures in extraordinary times” slogan are using unconventional monetary policies that nobody would have dared to propose ten years ago. Perhaps it would be better for the CBRT to adopt a new monetary policy framework in which it will pursue complementary objectives like price stability and strong economic growth.

A dual mandate and nominal GDP targeting are two alternative options that are more growth-friendly. In the dual mandate, the CBRT will not only target inflation, but also unemployment rate. Since unemployment rate is an important indicator of economic activity, it gives us important signals about the economic growth.  If this option were to be followed, the CBRT should take into account both inflation and unemployment rate when it decides its policy interest rate and when it makes use of other monetary policy instruments. When the domestic or global economy face challenges, the CBRT will prioritize growth by rigidly reaching its unemployment target; when the economy overheats, the CBRT will focus more on inflation.

The Federal Reserve System (Fed), the central bank of the United States, is a good example of a dual mandate. First, the Fed has an inflation target of 2%. Second, it has a maximum employment target, which is not constant but changes according to economic projections. Nowadays, the Fed tries to keep unemployment around 4.8%.

The second policy option is nominal GDP targeting. Under this option, the CBRT will respond to shocks by taking into account both inflation and the level of GDP. When there is a supply-shock such as a sudden increase in oil and food prices or a natural disaster, the central bank will not increase policy interest rate as this will not reduce cost-push inflation, but will reduce GDP. Therefore, the central bank will not increase interest rate in order to achieve the nominal GDP target. The situation is the same when there is an adverse trade shock.

It is clear that Turkey needs a new central banking framework. Current policies under inflation targeting do not respond to Turkey’s needs.

It is clear that Turkey needs a new central banking framework. Current policies under inflation targeting do not respond to Turkey’s needs. Academics, politicians, bureaucrats and representatives of the financial sector should discuss potential options that will further support Turkey’s efforts to reach the upper steps of the economic development ladder. If one of the aforementioned options seems more suitable for the Turkish economy, the government should think about changing the law defining the central bank’s responsibilities. But, we should also keep in mind that monetary policy is not a panacea.

Monetary policies implemented by developed countries after the GFC couldn’t restore insipid economic growth. A monetary policy will be helpful in smoothing out fluctuations in prices and economic activity, but it cannot bring about long-term growth. Structural reforms, smart industrial policies and a sound fiscal policy are necessary for long-term economic growth. A well-founded monetary policy can only play a supporting role.