Monetary Policy of Turkey - Finance Essay Sample

Monetary policy is the process by which the monetary authority of a particular country controls the supply of money, especially the interest rate to ensure price stability and currency trustworthiness (Nas & Perry, 2000). A regulatory body is placed in charge of formulating fiscal policies for the control of the economy through the determination of various interest drivers for the economy (Alp & Elekdag, 2011). The supply and demand relationship in government bonds is often controlled by the Central Bank of that country. This paper looks at the control that the Central bank of the Republic of Turkey exerts in controlling the monetary policies in Turkey.

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There are generally two types of monetary policy, which is expansionary and contractionary. Both policies reflect the prevailing financial conditions in a country which will require their enactment to react to the changes in the fiscal environment. Expansionary monetary policy or easy monetary policy increases the money supply which in turn stimulates the economic growth of a country. On the other hand, contractionary monetary policy slows down the money supply so as to control inflation (Sengonul & Thorbecke, 2005). Depending on the current situation in the country, different policies will be put in place. For example, where high growth rates are expected, the countrys central bank will often cut interest rates and increase demand and thus achieve this ends. However in the face of economic downturn, the central bank of a country will often increase interest rates and reduce cash flows to defend the economy from excessive losses during the downturn (Ozatay, 1997; Berument, 2007).

The central banks of different countries use different methods to control the monetary policy such as open market operations which expands the money supply by buying some of the government bonds or sells the government bonds to contract the money supply (Ege-Yazgan & Yilmazkuday, 2007). Turkeys Central Bank becomes the centre of interest in this paper following continued applications of different policies that have led to certain economic consequences in the country. Therefore, the interest with this country in this paper presents a case study approach to the country with regards to the application of different policies in different economic situations.

Turkey has had an independent monetary policy since 1931 where it started off by selling bank notes and has thrived since then (Baskaya, et al., 2008). In the 19th century during the presence of Ottoman Empire, the treasury operations were mainly controlled by the jewelers and the mint. These organizations minted gold coins on behalf of the Sultan and distributed the banknotes as well (Berument & Tasci, 2004). Later on, the Imperial Ottoman Bank was granted the privilege of issuing bank notes and lending small amounts of money to the bank. In addition to this, they collected revenues and made interests from foreign debts. After the First World War, deliberations for the establishment of Central Bank of Turkey were made and the law was enacted (CBRT , 2012). The country required a comprehensive program that would stabilize the economy. The central bank started acquiring its legal status and soon thereafter, the economic development of the country was being supported by a stabilized monetary policy. It was founded on 11th June 1930 by Governor Murat Cetinkaya who introduced this idea together with other members of the board. The shares of Central Bank of the Republic of Turkey are divided into four categories: Turkish Treasury, National banks, other banks and Turkish commercial institutions. Distributing these shares to different sectors of the countrys economy ensures a stable financial position of the country. The Central Bank controls the monetary policy in Turkey by determining the amount of money flowing in these classes which in turn ensures price stability in Turkey (Emir, et al., 2000). The monetary policy in Turkey was mainly controlled by rediscount ratios that controlled the circulation of money by putting measures that maintains a stable currency (Kesriyeli & Kocaker, 1999). In 1940, the Central Bank came up with policies that introduced an independent monetary policy. Throughout the years, the country faced many obstacles in trying to stabilize the money supply; one of them being the wars that had enormous effect on the economic growth of the country. That is the first and second world wars (Reinhart & Rogoff, 2009).

An exchange rate stabilization program was introduced in 2000 to deal with inflation by breaking the inflationary inertia. This exchange program was guided by a law that the money supply could only be changed by the net foreign assets. Inflation was a major problem in Turkey during the 21st century (Berument & Dincer, 2008). Due to this, a modern monetary policy strategy was put in place. The regime was meant to control the levels of inflation by strengthening the infrastructure of the country (Erol & Van-Wijnbergen, 1997). Furthermore, the department for research and monetary policy was introduced which had the responsibility of announcing the policy decisions. A two-stage monetary reform was also launched to enhance the credibility of the Turkish currency by removing the six zeros from the bank notes (Otazay, 2007). Later on the prefix New used on the Turkish Lira was circulated in different sizes. In the recent years, the monetary policy of Turkey is being developed through a dynamic framework that consists of global and domestic developments (Zsuzsanna, 2014). Incomes policy that ensured that the public wages were kept aside to remedy inflation was put in place as well. These policies produced desirable results since the interest rates went up and exposed the domestic banking to potential stocks (Bofinger, et al., 2001; Mohanty & Klau, 2005).

The Central Bank of the Republic of Turkey is the countrys monetary authority. Its primary goal is to sustain a stable financial system as defined by the law (Fry, et al., 2000). Moreover, it has the responsibility of printing and circulating money, establishing payment systems and managing International reserves of the country. The bank implements the monetary policy instruments in order to maintain a price stability. There is a board of directors that is composed of the governor, board members, members of the auditing committee and deputy governors. The stability of the monetary policy are controlled by the above departments (Ozatay, 1997). The members of these departments hold an academic degree in banking and finance. They have various duties and powers that allow them to work effectively in this field. Some of these duties are determining the principles of monetary policy to maintain price stability, to determine the framework of the monetary policy strategy, to prepare reports for the implementation of monetary policies and to take measures to protect the domestic and international value of Turkish Lira. After any meeting is held by the board of committee, the decision is published in the Gazette to ensure that people have adequate knowledge on monetary policy. The Monetary policy committee meets every month and a summary of what has been discussed is published within 5 working days (Balino, et al., 1999).

The Turkish monetary policy was faced with a crisis that triggered alternative monetary policy frameworks. A higher inflation was experienced due to higher oil prices that led to appreciation of Turkish Lira which in turn amplified the demand for the domestic stocks (Brada & Kutan, 2001). The long-term effects were that the financial conditions of the bank deteriorated substantially. A new program was introduced to enhance a healthy and transparent banking system which meant that the entire monetary policy of Turkey would be restructured to ensure that the country does not experience the financial tragedy that they faced in the past. In 2010, the country experienced rapid credit growth and deterioration in its currency hence has to introduce a new monetary policy framework that would deal with the global imbalances (Basci, 2012). This has forced the Central Bank of Turkey to adopt a new set of policy that are meant to deal with the macro financial risks (Sengonul & Thorbecke, 2005). The Central Bank has the mandate of implementing measures of achieving price stability. Therefore, after this crisis, a new strategy was introduced in 2010 in achieving its objective. Some of these strategies used to reverse the financial imbalances in Turkey are interest rates and reserve requirement ratios that reduce excessive credit worth. The Central Bank of Turkey implemented the same policy used by the developing countries but in the opposite direction after the sovereign debt problems. In addition to this, liquidity measures were put in place to deal with the fluctuations. Due to the inflation in the prices of goods, the policy had no encouraging effects. This made the bank to introduce the overnight lending rates that were adjusted to tighten the liquidity conditions.

Due to the escalating uncertainties in the European economy, the Turkish monetary policy was made around two axes. These two axes include: diverging the capital inflows towards long-term investments and preventing the Turkish lira from over-appreciating and also, balancing the domestic and external demand (Reinhart & Rogoff, 2009). In implementing these policies, the interest rate corridor was widened to the south to ensure intense capital inflows. On the other hand, the reserve requirement ratios were increased as a way of controlling domestic demand. Foreign exchange auctions are held regularly to mitigate excessive appreciation on the Turkish Lira. As a consequence, there have been quality capital inflows and a balanced economy. These measures helped in alleviating the degree of fluctuations.

The central bank of Turkey acknowledges the fact that there might be the existence of inflation in the future. Therefore, the current monetary policy has been put in place to deal with future single digit inflation. A base money is put aside to ensure a growth and lower inflation rates. The board of directors has also introduced quantitative formalities on Net Domestic Assets that focus on maintaining a firm control over inflation (Aysan, et al., 2014).

In conclusion, the effectiveness of a monetary policy depends on the policy interests of the financial prices. The monetary policy of Turkey can be said to be have been effective since the time it was implemented. The modern monetary policies of Turkey have allowed for well-functioning markets. Through financial competitiveness in terms of the countrys currency and favorable economic conditions, the policy have ensured that the economic development of the country growths rapidly. The policies have been used to regulate the liquidity of the currency, profitability of the banks and levels of inflation. Furthermore, the measures implemented have led to monetary growth and controlled the rates of capital inflows.

References

Alp, H. & Elekdag, S., 2011. The role of monetary policy in Turkey during the global financial crisis. IMF Working Papers, pp. 1-74.

Aysan, A., Fendoglu, S. & Kilinc, M., 2014. Managing short term capital flows in new central banking: unconventional monetary policy framework in Turkey. Eurasian Economic Review, 4(1), pp. 45-69.

Balino, T., Bennett, A. & Borensztein, E., 1999. Monetary policy in dollarized economies (vol. 171), Geneva: International Monetary Fund.

Basci, E., 2012. Monetary Policy of Central Bank of the Republic of Turkey after Global Financial Crisis. Insight Turkey, 14(2), p. 23.

Baskaya, S., Kara, H. & Mutluer, D., 2008. Expectations, communicatio...