Time-Varying Taylor Rule Estimation for Turkey with Flexible Least Square Method

Abstract

In this study, we estimate a time-varying Taylor rule for evaluating the policy reaction function of the Central Bank of the Republic of Turkey (CBRT). Even though the Turkish economy has been continuously evolving in the last 15 years, previous studies that analyze the monetary policy rule of the CBRT mainly use time-invariant monetary policy functions. We propose a flexible two-stage least square regression to deal with both instability and endogeneity problems in the monetary policy functions. By analyzing the period between 2006 and 2019, we clearly show that the monetary policy function of the CBRT changes over time, and using a time-invariant monetary policy rule model would yield misleading results.

Publication
Forthcoming in BU Journal
Baris Soybilgen
Baris Soybilgen
Assistant Professor in the Department of Management Information Systems

Economist with a strong focus in applied econometrics and data science.