Turkey's trilemma trade-offs

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we study the trilemma configuration of the Turkish economy. The paper starts by empirically testing the Mundell-Fleming theoretical concept of an “impossible trinity” (trilemma) for Turkey, following the Aizenman, Chinn and Ito (ACI) approach. This includes calculating the trilemma indices and investigating their evolution over the period of 1998Q1-2010Q4, which is split into sub-samples according to the Turkey’s macroeconomic policies. We also introduce alternative empirical techniques in order to deal with possible misspecification problems detected in the ACI approach. These techniques include employing additional terms in the regression, Two Stage Least Squares and Kalman filtering. These analyses show how contributions of financial integration and monetary independence have increased from the first period to the last, with corresponding limitations on exchange rate stability. The analysis continues by exploring the implications of changes in the trilemma indices for inflation. Accordingly, it reveals evidence that trilemma indices have impacts on inflation for the period of 2003-2010. Finally, it finds that there is a key role for international reserves as trilemma trade-offs and their effects on inflation can be mitigated with their accumulation. *

Keywords: Trilemma; exchange rate stability; monetary independence; capital openness; reserve accumulation (search for similar items in EconPapers)
JEL-codes: F15 F31 F32 F41 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-ara, nep-cwa and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:35623

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