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The Great RecessionLessons for Central Bankers$
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Jacob Braude, Zvi Eckstein, Stanley Fischer, and Karnit Flug

Print publication date: 2013

Print ISBN-13: 9780262018340

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018340.001.0001

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The Role of Monetary Policy in Turkey during the Global Financial Crisis

The Role of Monetary Policy in Turkey during the Global Financial Crisis

(p.51) 2 The Role of Monetary Policy in Turkey during the Global Financial Crisis
The Great Recession

Harun Alp

Selim Elekdağ

The MIT Press

Turkey is an interesting case study because it was one of the hardest hit countries by the crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating this fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) cut policy rates by an astounding 1025 basis points over November 2008–November 2009. In this context, this chapter addresses the following question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recession have been? Counterfactual experiments based on an estimated structural model provide quantitative evidence which suggests that the recession would have been substantially more severe. In other words, the combination of exchange rate flexibility and the interest rate cuts implemented by the CBRT substantially helped soften the impact of the crisis.

Keywords:   Financial accelerator, Bayesian estimation, DSGE models, financial crises, Sudden stops, Monetary policy, Turkey, Emerging economies

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