The crisis thought the CBT that ensuring price stability alone could not be the only objective of the central bank and that the scope of the monetary policy must not be limited to this aim.

One of the important monetary policy lessons learned from the global crisis was that ensuring price stability alone could not be the only objective of the Central Bank (CBT) and that the scope of the monetary policy must not be limited to this aim. It was reiterated that central banks need to shape their policies as well considering the financial stability. Of course this has always been among the responsibilities of the central bank. But it was believed that one the price stability is ensured, others would come along with the help of the macroeconomic regulations and checks to be fulfilled by other relevant institutions. It was in a way assumed that once the price stability is secured, financial stability will come automatically. Therefore, no need was seen in devising policies devoted specifically to secure the financial stability. The global crisis, however, proved that this was wrong.

Inflation mafia

This was when the problems emerged. There was a matured and fully developed theoretical framework devoted to assure price stability. What is more, a huge experience had accumulated since many central banks implemented this framework. This experience was so strong that many central banks that pursued inflation targeting regime used to discuss the content of inflation reports, figures to be involved or the language to be used in monetary policy committee remarks, hold joint meetings and exchange experts.

For instance, in 2005, before the introduction of inflation targeting regime in 2006, officials of the CBT worked thoroughly on preparing the content of the inflation report, particularly the figures and subtitles of the report that will give an idea to the public about how the monetary policy will be shaped in the future. To benefit from this experience, experts from other central banks were met and debates on the models to be used were held. So to speak, there was an "international inflation targeting mafia" and you had to "get involved" as this was helpful. However, there is no theoretical framework about how to implement a monetary policy that will secure both price stability and financial stability. There is no experience in this respect, either. This risks hindering the communication policy. How should you express or write the situation? The issue is a bit blur.

The lesson the CBT learned

With the lessons learned during the global crisis, the CBT highlighted the objective to secure financial stability as well as the price stability. Therefore, it has got ahead a number of central banks. The CBT has made important progress in this direction since the late 2010. As you might remember my commentaries back then congratulated the CBT for its courage and defined the new policy framework as one that "breaks the routine". That it broke the routine was evident since the policy framework has gone beyond the classical inflation targeting regime. And it was courageous since the policy lacked a solid theoretical framework and a definite communication policy.

Unfortunately, two big mistakes were made during the implementation process. First, as I have mentioned frequently before, the CBT thought that raising reserve requirements alone without supporting it with other policy measures (some of these supporting measures were initiated eight months later after the elections) could limit the credit supply. The second mistake was that the remarks by the CBT officials and official reports gave the impression that the CBT has multiple objectives. I still cannot understand how the CBT could make the first mistake because it conflicts with the Bank's inflation targeting experiences as well as with the international experience. The second mistake is more understandable: it is a direct outcome of "walking in the dark" as I mentioned above. In Saturday I will dig in the second mistake about communication.

This commentary was published in Radikal daily on 11.08.2011