The search for a new monetary policy (conclusion)
Fatih Özatay, PhD
02 February 2012
There are several ways to harmonize the policy tool devoted to ensure financial stability and to ensure price stability. Now it’s finally time for the last commentary of the series. Here is how I concluded on Tuesday: “The policy rate is a strong tool as long as it can affect the market interest rate. The way to affect the market rate, however, is to ensure that the short term market interest rate and the policy rate stand close to each other. However, the CBT has been allowing the former deviate continuously from the latter, in different directions and magnitudes. In a nutshell, in order to ensure that the macro-prudential tool serves its purpose, the CBT is allowing the policy rate lose its influence as a policy tool. How can the two tools work harmoniously?”
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The search for a new monetary policy (5)
Fatih Özatay, PhD
31 January 2012
In order to ensure that the macro-prudential tool serves its purpose, the CBT is allowing the policy rate lose its influence as a policy tool. On Saturday, I stated that the Central Bank of Turkey (CBT) has used the required reserve ratio as a macroprudential policy tool with the aim to lower the risk of financial instability stemming from rapid credit growth. This policy attempt, however, encountered a dilemma: If the banks wanted to maintain the current pace of increase in credit supply, they could offset the funds (deposits) the CBT withdrew via increasing reserve requirements by borrowing from the CBT on a weekly basis since the maturity of the withdrawn funds were remarkably low. In order for the weekly interest rate, the other policy tool of the CBT, to influence the market interest
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The search for a new monetary policy (4)
Fatih Özatay, PhD
28 January 2012
If the steps taken to launch the reserve requirement policy had not disturbed the policy rate mechanism, we would not have cared about this non-functionality. I am continuing with the fourth commentary of the series. I called the prevalent pre-crisis monetary policy the “classical policy.” Then, I drew the framework of a “new policy” addressed frequently in both theory and practice though there is no common agreement on it. The new policy suggests how central banks have to set the value of at least two policy tools: the policy rate and macro-prudential policy tool.
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The search for a new monetary policy (3)
Fatih Özatay, PhD
26 January 2012
The policy rate and the macro-prudential policy tool shall counteract each other in order to prove fruitful. Here is the third commentary of the series. In the previous commentary, I summarized the monetary policy commonly applied before the global crisis which I called “the classical policy.” Then, I drew a monetary policy framework I called “the new policy”, which is voiced frequently both in theory and practice. The new policy suggests how central banks have to set the value of at least two policy tools: the policy rate and macro-prudential policy tool. Extreme risk-taking in periods of economic growth The rationale for macro-prudential policy tools can be explained as such: in periods of rapid economic growth, the perception that thing will always go well and triggers the risk-taki
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The search for a new monetary policy (2)
Fatih Özatay, PhD
24 January 2012
It would be a rational expectation that as real interest rate increases, consumption and investment expenditures, that is, demand and production, will decrease, and vice versa. I would like to continue with the new monetary policy series straight. Today I will discuss how to revise the monetary policy focused solely on price stability in a way that it regards both price and financial stability. I will call the former monetary policy based on price stability “the classical monetary policy.” This might refer to the classical inflation targeting regime as well as the policy the Federal Reserve (FED) implements. Under the classical policy, the objective of the central bank involves inflation gap and output gap. Inflation gap refers to the difference between the actual inflation and targeted in
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The search for a new monetary policy (1)
Fatih Özatay, PhD
21 January 2012
How can we rearrange the pre-crisis monetary policy to guard financial stability as well as price stability? My recent commentaries about monetary policy concluded on the pressing need for a new institutional regulation. For instance, my last commentary concluded, “We had better return to the inflation targeting regime. Also, it is possible to strengthen this regime in a way that it also safeguards financial stability. To this end, we need to consider options to transfer certain powers of the Banking Regulation and Supervision Agency to the Central Bank of Turkey (CBT).” I also explained why I have reached such conclusion. I want to summarize these neatly. Starting with today, I will talk about “the search for a new monetary policy.” Price stability is the priority This is how the debat
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FED’s recommendations to the CBRT
Fatih Özatay, PhD
20 January 2012
We need to consider options to transfer certain powers of the Banking Regulation and Supervision Agency to the Central Bank. According to a story featured on Bloomberg website on January 6, the Chairman of the Federal Reserve Bank (FED) of St. Louis declared that the FED considered launching an inflation targeting regime. The story also highlights opinions of some economists on his remarks. There is a widespread belief that a publicly disclosed inflation target would be a key step for FED’s transparency policy.
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We are not accustomed to this...
Fatih Özatay, PhD
17 January 2012
S&P has cut sovereign ratings of many Eurozone countries. Currently, ratings of three Eurozone countries are lower than that of Turkey. The new Spanish prime minister spoke in a party meeting in Malaga one day after the S&P cut the sovereign rating of the country. He said that Spanish people had recently met with concepts like “sovereign rating and risk premium cut/increased” and stressed that his government would survive the country of this odd situation.
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Financing current account deficit
Fatih Özatay, PhD
12 January 2012
European banks in deficit should not choose to close the capital gap by cutting credit supply steeply for Turkey to enjoy easy access to foreign funds. There is a common anticipation that the Turkish economy will grow at a significantly lower in 2012 compared to 2011. The main reason for such an anticipation, which actually does not match with the latest data, is that fund inflows will slow down due to the European crisis. Yesterday, balance of payments data for November 2011 was announced. So, to what extent the data and the mentioned anticipation are in harmony?
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Developments about industrial production
Fatih Özatay, PhD
10 January 2012
The first conclusion these figures lead us to is that industrial production did not slow down in November 2011. Industrial production figures for November were announced. Industry had dropped steeply during late 2008 and the first half of 2009, the periods when the impact of the global crisis were the severest. After that period, industrial production picked up rapidly starting with early 2011. Between December 2009 and February 2011, industrial production expanded year-on-year by 14 .4 percent on average. Since March, annual growth rates have been lower: 8.1 percent on average for the period between March 2011 and November 2011. Industrial production growth in November was 8.4 percent, close to the March-November average. The figure below shows the annual percentage change in industrial p
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