Why not strengthen the inflation targeting regime taking into consideration the current circumstances rather than abandoning it?

Table 1 shows the inflation targets, inflation realization and growth rates for years between 2002 and 2011. The table also provides the deviation of growth from potential and of inflation from the target. I assumed that the potential growth rate was 4.7 percent. The examined period can be divided into four sub-periods:

First is the period during which inflation was below the target and growth was above the potential (high growth – low inflation period): 2002-2005. This was the implicit inflation targeting period. A similar picture was observed also in 2010. Second is the period during which inflation stood above the target and growth at or below the potential (low growth-high inflation period): 2007-2008. Third is the period during which inflation was above the target and growth was above the potential (low growth-high inflation period): 2006 and 2011. 

The worst years
In the fourth period, inflation was below the target and growth was below the potential (low growth-low inflation period): 2009. Let’s leave aside 2009, a year of abnormality during which the global crisis had been felt most severely. So, we can skip the fourth period. The first group clearly marks the most successful inflation targeting regime. Therefore, 2002-2005 period and 2010 were the most successful among the examined years.  Also, we must note that the credibility of the inflation targeting regime was the highest during this period. 2007 and 2008 were the least successful years with this respect: neither the inflation target was met, not the economy fulfilled its potential growth rate. 2006 and 2011 stands in between. But, considering the credibility of the inflation targeting regime, the large deviation upwards from the target makes the years unsuccessful.

Excluding 2009, inflation targeting regime was implemented for nine years. The regime was successful in five out of nine. You might object this assessment and argue that inflation targeting regime was not implemented in 2011. And you are right. This is what I wanted to stress. In that case, inflation targeting regime was implemented for eight years and succeeded in five years.

Please note that Turkey was not in a financial crisis in any of these eight years. Also, note that it is necessary to decide on a new monetary policy regime if the inflation targeting is to be abandoned. Keep in mind the monetary policy turmoil in 2011. So, why not strengthen the inflation targeting regime taking into consideration the current circumstances rather than abandoning it? Why seek adventure in the field of monetary policy in 2012? Do you really think this is necessary?

This commentary was published in Radikal daily on 05.01.2012