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Monetary Policy of Central Bank of the Republic of Turkey after Global Financial Crisis

The recent global financial crisis presented substantial challenges and lessons for all economic agents. One of the most important lessons learned was the indispensability of financial stability for the smooth functioning of the economy as a whole. The Central Bank of the Republic of Turkey (CBRT), being aware of the conditions that new global economic conjuncture necessitates, decided to modify its existing framework of inflation targeting by adopting a new policy by using required reserve ratios and interest rate corridor. The new policy mix approach preserves the main objective of achieving and maintaining price stability while safeguarding financial stability as a supporting objective.

Monetary Policy of Central Bank of the Republic of Turkey
An Occupy Wall Street protester sits near makeshift signs in New York’s Union Square.

The expansionary monetary policies, which were adopted by central banks of developed countries in the aftermath of the global financial turmoil with the aim of containing the impact of the global crisis, had significant implications for developing economies and Turkey was no exception.1 During this period, the availability of ample and low-cost short-term foreign financing led to a rapid credit expansion and appreciation pressure on the Turkish lira. This brought the accumulation of macro-financial risks and rising external imbalances as of the second half of 2010.2 As escalating risks pertaining to financial stability have the potential to hamper price stability over the medium term, different approaches for incorporating financial stability into the monetary policy framework started to be discussed in the academic literature and policy institutions.3

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