Taylor rule for Turkey under multiple structural breaks: Estimating the forward-looking taylor rule for Turkey under multiple structural breaks

Abstract

We estimate a forward-looking Taylor rule for Turkey covering both implicit and explicit inflation-targeting periods. In this analysis, we also consider the presence of structural breaks in the policy coefficients. Even though the Turkish economy has been undergoing several structural changes since 2002, the previous studies that estimate the monetary policy rule for Turkey disregard structural breaks, while fitting a policy reaction function. In this study, we examine a Taylor rule for Turkey using a two-stage least square regression that is coupled with the analysis of multiple structural breaks with unknown dates. By using this methodology, we show that the monetary policy function of the Central Bank of the Republic of Turkey exhibits four different periods. This result demonstrates that it is crucial to take account of structural breaks, while estimating monetary policy rules. © Peter Lang AG 2019.