Turkish Monetary Policy: Beyond the Apparent
At the Central Bank of Turkey’s monthly meeting with economists last week, Governor Erdem Başçı recommended a visit to the Central Bank’s art collection, which is on temporary display at the Pera Museum, to those who could not make much sense of Turkish monetary policy.
“Beyond the Apparent” has miraculously made me realize how the Bank’s measures fit into the global rethink of central banking. A recent Brookings Institution report, co-authored by sixteen influential economists, and summarized in the Financial Times by three of them, argues that central banks should not worry only about inflation but also financial stability.
In retrospect, then, the Central Bank of Turkey, with its unorthodox policy mix designed to curb credit growth and control the current account deficit, which it introduced nearly a year ago in the name of financial stability, looks progressive and ahead of the curve. However, I have never criticized the Bank for its noble goals, only its methods.
For example, the Bank was trying, in vain, to target both the quantity (liquidity) and the price (interest rate) of money for a long time. It has since admitted that its policies were not influential in slowing down credit growth until the banking regulator came to the rescue during the summer.
Similarly, its more recent policies to strengthen the lira are suffering from the well-known fact that you cannot target both the exchange rate and conduct monetary policy at the same time without capital controls. In fact, you could see its latest move of keeping banks’ funding costs in a wide band, in between the policy and overnight rates, as an attempt to overcome the Impossible Trinity.
The Brookings paper also argues that if a central bank is following several mandates, more transparency and better communication are crucial. For example, it needs to be explicit about how it seeks to balance the objectives of price, output and financial stability.
The Central Bank of Turkey has not done well by this measure. Just ask the confused market participants. Likewise, the Bank's focus has been constantly shifting: Until August, it was the current account deficit, when the Bank suddenly cut the policy rate in response to growth concerns due to Euro Area woes, before switching to inflation in October.
When I made this point at a seminar last week, the speaker, Koç chief economist Ahmet Çimenoğlu, reminded me of the famous Keynes quote: “When the facts change, I change my mind. What do you do, sir?” The Central Bank may be shifting gears so quickly precisely because global conditions are changing rapidly, but even if that’s the case, it has not communicated its arguments effectively.
But perhaps I should give the Bank a break. As Claudio Borio argues in a recent BIS paper, “Central banks are facing enormous pressures to prove that they can manage the economy, restore full employment, ensure strong growth and preserve price stability. This, in fact, is a taller order than many believe, and one that central banks alone cannot deliver.”
So maybe I should have been pointing my arrows at the government, who has acted like a deer in headlights in response to the Euro Area crisis