In mid-May 2001, just three months after the February crisis, Turkey started to implement a new economic program. One major integral part of the program was to overhaul the failing banking system.
The rescue program for the banking sector, inevitably, increased public debt-to-GDP ratio sharply. Therefore, other targets of the program, i.e. macroeconomic discipline and the ambitious agenda for structural reforms had to be achieved under severe fiscal dominance.
Main challenge faced by the monetary authorities in the post-crisis period was the fiscal dominance caused by high public debt. There were other challenges as well: high pass-through, backward looking pricing, and the weak banking sector. Such challenges render the Turkish monetary policy experience of the post-crisis period a rather interesting one to analyze and draw lessons from it.
In this paper we provide an account of the monetary policy experience of Turkey. The following section is devoted to the challenges faced by monetary policy in the aftermath of the crisis. The implicit inflation targeting and the outcome are analyzed in the third section. In the fourth section we discuss the decision to shift to formal inflation targeting at the beginning of 2006 and the experience up to now. Final section concludes.
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