Maintaining price stability has been assigned as the primary objective of monetary policy and the inflation targeting regime has been adopted by the new legal arrangement made in 2001 in Turkey. However, the current account deficit has become a serious problem along with the efforts to decrease inflation during 2000s. In this study, after explaining the relationship between the goals and instruments of monetary policy in an open economy where an inflation targeting regime is implemented, we estimate the effects of monetary policy shocks on the current account and the real exchange rate in the Turkish economy. Our results from the structural VAR estimation show that a positive nominal shock has an favorable effect on the current account in the short run which disappeared in the long run. Our findings are consistent with the predictions of the redux model on which the New Open Economy Macroeconomy literature has been developed.
Key words: Inflation Targeting, Current Account Balance; Exchange Rates; İmpossible Trinity; Redux Model Article Language: EnglishTurkish
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