Mitigating Turkey's Trilemma Tradeoffs

Yasin Akcelik, Orcan Cortuk, Ibrahim Turhan
2014 Emerging markets finance & trade  
We study the trilemma configuration of the Turkish economy for the period between 2002 and 2012. The paper starts by empirically testing the Mundell-Fleming theoretical concept of an "impossible trinity" (trilemma) for Turkey, following Aizenman, Chinn and Ito (ACI, 2008). This includes calculating the trilemma indices and regressing them on a constant. We show that there is a misspecification with ACI approach and improve the specification by applying a Kalman filter to the classical linear
more » ... classical linear regression that enables us to capture the time-varying importance of policy decisions within the trilemma framework. By comparing the residuals of each approach, we show that Kalman filter analysis has superior results. Then, our analysis continues by revealing a role for central bank foreign reserves and required reserves in mitigating the trilemma tradeoffs -we show that foreign reserves to GDP ratio and required reserve ratio have positive significant impact on the residuals obtained from the trilemma regression, thus making the policy tradeoffs smaller. * Istanbul Stock Exchange. † Central Bank of the Republic of Turkey. ‡ Central Bank of the Republic of Turkey. 1
doi:10.1080/1540496x.2014.1013862 fatcat:2f67hvfahvdi5fmzfnrboz2e7i