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.

Of course, announcing an inflation target is not the only aspect of an inflation targeting regime. We learned this from Turkey’s experiences with the regime until the end of 2010. On the other hand, we have to note that the current policy of the FED is quite similar to the inflation targeting regime except it does not declare any inflation target. 

There is no contradiction
Those who are familiar with the subject might find this argument “weird” since the common view is in the opposite direction. The strongest evidence this common view is based on is the fact that the relevant law stipulates FED to implement monetary policy to fulfill two chief objectives: maintaining price stability and maximizing employment. There is a widespread argument that the latter in particular contradicts with the inflation targeting regime.

However, there is no contraction here. The common regime around the world is the flexible inflation targeting regime. In this context, central banks assume two main objectives, composed of the weighted average of two variables. First is the difference between inflation and inflation target, and second between the level of output and potential level of output. The latter, known as the output gap, can also be written in terms of the difference between unemployment level and natural (normal) level of unemployment. Therefore, there is no significant difference between the objectives of the FED and any central bank which implements a flexible inflation targeting regime.  Furthermore, FED is an independent central bank and the monetary policy framework it sticks to do not contradict with the inflation targeting regime except declaring an inflation target and pursuing a communication policy on the basis of this target.

Lessons to be learned
Anyway... I addressed this quasi-academic discussion here as I find it highly interesting that Fed declared an intention to switch to an inflation targeting regime in this post-crisis environment during which doubts have been cast on the advantages of inflation targeting regimes. Also, let me remind you of FED Chairman Ben Bernanke’s academic contributions to the inflation targeting literature.

It is critical that he felt the need to take into account the regime in practice as well. What is more, this is not any regular practice we are talking about. Bernanke has been managing the monetary policy of the US which is of critical importance for the entire world. Regardless of whether FED puts this plan into practice or not, there is a lesson Turkey has to learn from this discussion. I have addressed this issue several times here independent of this discussion. I will try once again with reference to the FED discussion above. Maybe it reaches the audience this time:

The monetary policy framework Turkey implemented between 2002 and 2010 was a strong one. There is no need to take steps that will contradict with this framework. 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.

This commentary was published in Radikal daily on 19.01.2012