THE “UNORTHODOX” MONETARY POLICY OF THE CENTRAL BANK OF THE REPUBLIC OF TURKEY: DOES IT WORK? Master Thesis BASAK BARCIN Supervised by Mr Evren Ors September 2012 1 BURSİYERE AİT BİLGİLER Ad / Soyad BAŞAK BARÇIN TR2009/0135.02- Referans Numarası Sözleşme Numarası JM -148EN 02/054 Sektör (Kamu, Üniversite veya Özel ÜNİVERSİTE Sektör) Bursiyerin Bağlı Olduğu Kurum / Birim / GALATASARAY ÜNİVERSİTESİ / İli EKONOMİ / İSTANBUL Bursiyerin Bağlı Olduğu Kurumdaki ÖĞRENCİ Ünvanı Öğrenim Gördüğü Dil İNGİLİZCE Çalışma Alanı (İlgili Müktesebat Başlığı. FİNANSAL HİZMETLER Örn: Çevre, Ulaştırma, vb.) E-posta (Birden fazla belirtilebilir.) [email protected] JEAN MONNET BURS PROGRAMI KAPSAMINDA ÖĞRENİM GÖRÜLEN PROGRAMA AİT BİLGİLER Öğrenim Görülen Akademik Yıl 2011 – 2012 (Örn: 2009 – 2010, 2010 – 2011) Üniversite HEC PARIS Ülke / Şehir FRANSA, PARİS Fakülte / Bölüm HEC PARIS / FİNANS BÖLÜMÜ Programın Adı MSc in Finance (Business Track) / Masters (Örn: LLM in European Law, Msc. in in International Finance Economics vb.) Programın Türü (MA, MSc, kısa süreli MSc araştırma programı, vs.) Programın Başlangıç / Bitiş Tarihleri 07/09/2011 – 31/08/2012 Öğrenim Süresi (ay) 12 ay “THE “UNORTHODOX” MONETARY Tez / Araştırma Çalışmasının Başlığı POLICY OF THE CENTRAL BANK OF 2 THE REPUBLIC OF TURKEY: DOES IT WORK? Danışmana / Baş Ad / Soyad EVREN ORS Araştırmacıya Ait E-posta [email protected] Bilgiler 3 INFORMATION ABOUT THE SCHOLAR Name / Surname BASAK BARCIN TR2009/0135.02 – Reference No. Contract No. JM – 148EN 02/054 Sector (Public, University or Private UNIVERSITY Sector) GALATASARAY UNIVERSITY / Scholar’s Affiliation / Department / City ECONOMICS / ISTANBUL Scholar’s Title STUDENT Language of Instruction ENGLISH Field of Study (Related Acquis Chapter. FINANCIAL SERVICES E.g. Environment, Transportation, etc.) E-mail (More than one e-mail might be basak [email protected] specified.) INFORMATION ABOUT THE EDUCATION PROGRAMME Academic Year 2011 - 2012 (e.g. 2009 – 2010, 2010 – 2011) University HEC PARIS Country / City FRANCE / PARIS Faculty / Department HEC PARIS / FINANCE DEPARTMENT Name of the Programme MSc in Finance (Business Track) / Masters (e.g. LLM in European Law, Msc. in in International Finance Economics vb.) Type of the Programme (MA, MSc, short MSc study, etc.) Start / End Dates of the Programme 07/09/2011 – 31/08/2012 Duration of Education (months) 12 MONTHS THE “UNORTHODOX” MONETARY Title of the Dissertation / Research Study POLICY OF THE CENTRAL BANK OF THE REPUBLIC OF TURKEY: 4 DOES IT WORK? Information about the Name / Surname EVREN ORS Advisor / Principal E-mail [email protected] Researcher 5 TEZ/ARAŞTIRMA RAPORU ONAY SAYFASI Başlığı THE “UNORTHODOX” MONETARY POLICY OF THE CENTRAL BANK OF THE REPUBLIC OF TURKEY: DOES IT WORK? olan ve BAŞAK BARÇIN tarafından sunulmuş olan tezi/araştırma raporunu inceledim ve kabul edilmeye değer buldum. 24/10/2012 [Tez danışmanının ya da baş araştırmacının Adı ve Soyadı] [İmza] Prof. Evren Ors HEC PARIS 6 THESIS/RESEARCH REPORT APPROVAL PAGE I have examined the dissertation/research report entitled THE “UNORTHODOX” MONETARY POLICY OF THE CENTRAL BANK OF THE REPUBLIC OF TURKEY: DOES IT WORK? presented by BASAK BARCIN and hereby certify that it is worthy of acceptance. 24/10/2012 [Name and Surname of the thesis advisor or principal researcher] [Signature] Prof. Evren Ors HEC PARIS 7 TABLE OF CONTENTS LIST OF ABBREVIATIONS ........................................................................................ 9 LIST OF FIGURES ...................................................................................................... 10 LIST OF TABLES ........................................................................................................ 10 ACKNOWLEDGEMENTS ......................................................................................... 11 ÖZET ............................................................................................................................. 12 ABSTRACT ................................................................................................................... 13 INTRODUCTION ........................................................................................................ 14 1. CENTRAL BANKS AND MONETARY POLICY ............................................ 15 1.1. CENTRAL BANKS ........................................................................................... 16 1.1.1. Functions ...................................................................................................... 16 1.1.2. Objectives ..................................................................................................... 17 1.1.3. Central Bank Independence ......................................................................... 21 1.2. MONETARY POLICY ...................................................................................... 25 1.2.1. Goals of Monetary Policy ............................................................................ 25 1.2.2. Monetary Policy Tools ................................................................................. 29 1.2.3. The Conduct of Monetary Policy: Choosing and Using the Right Monetary Policy Instrument .................................................................................................... 31 1.2.4. Transmission of Monetary Policy through the Banking System .................. 34 2. MONETARY POLICY STRATEGIES OF THE CENTRAL BANK OF THE REPUBLIC OF TURKEY ........................................................................................... 37 2.1. MONETARY POLICY APPLICATION BETWEEN 1980 – 2010 .................. 37 2.2. THE UNORTHODOX MONETARY POLICY IN APPLICATION: 2010 - PRESENT ................................................................................................................... 58 2.3. EFFECTS AND OUTCOMES OF THE UNORTHODOX MONETARY POLICY ...................................................................................................................... 68 3. EVALUATION OF THE CBRT’S UNORTHODOX MONETARY POLICY . 80 3.1. GLOBAL EVALUATİON OF THE POLİCY PERFORMANCE ....................................... 81 3.2. EMPİRİCAL RESEARCH: INTERVİEWS ................................................................... 85 3.3. CRİTİCAL ANALYSİS OF THE CBRT’S UNORTHODOX MONETARY POLİCY ......... 93 CONCLUSION ............................................................................................................. 98 BIBLIOGRAPHY ....................................................................................................... 100 8 LIST OF ABBREVIATIONS • BRSA: Banking Regulation and Supervision Agency • CAD: Current Account Deficit • CBRT: Central Bank of the Republic of Turkey • ECB: European Central Bank • EM: Emerging Markets • Fed: US Federal Reserve • FX: Foreign Exchange • GDP: Gross Domestic Product • GNP: Gross National Product • MPC: Monetary Policy Committee • MTP: Medium-term Program • OMO: Open Market Operations • R&D: Research and Development • QE: Quantitative Easing • TL: Turkish Lira 9 LIST OF FIGURES Figure 1: Weight of Central Bank Objectives in Central Bank Laws ................................................... 18 Figure 2: Monetary Policy Objectives of Central Banks ....................................................................... 19 Figure 3: Correlation Between Average Inflation and Central Bank Independence (Alesina and Summers, 1993, p155) .......................................................................................................................... 22 Figure 4: Correlation Between Average Real GNP growth and Central Bank Independence (Alesina and Summers, 1993, p156) ..................................................................................................... 23 Figure 5: 2002-2005 Inflation Targets and Realizations ....................................................................... 54 Figure 6: Capital Flows to Emerging Markets ...................................................................................... 57 Figure 7: Accumulated Foreign Flows to Turkish Equity & Debt Markets .......................................... 59 Figure 8: Current Account Balance ....................................................................................................... 60 Figure 9: Turkey’s CAD as a % of GDP ............................................................................................... 60 Figure 10: Policy Rates and TL Required Reserve Ratios .................................................................... 62 Figure 11: Main Sources of Current Account Deficit Finance .............................................................. 63 Figure 12: Interest Rates and CPI Expectations in Turkey ................................................................... 64 Figure 13: Transmission Mechanism of the Unorthodox Monetary Policy .......................................... 65 Figure 14: Market O/N & Policy Rates ................................................................................................. 66 Figure 15: Market Liquidity .................................................................................................................. 68 Figure 16: Total Loan Growth Rates .................................................................................................... 70 Figure 17: CBRT Reserves ................................................................................................................... 72 Figure 18: Contribution of Consumption in Growth ............................................................................