ASYMMETRIC TAYLOR MONETARY RULE: THE CASE of TURKEY

Abstract

In this study, Taylor Monetary Rule (TMR), that has a significant place in economics literature, is analyzed and modeled in the framework of Threshold Regression Models. The TMR Model is studied under regimes of high inflation – low inflation / high output gap – low output gap and thus the ways in which relations occur between short term rates of interest, and inflation and output gap is analyzed. The Asymmetric TMR Model projection obtained from the analysis has yielded more accurate results than the linear model projections that were applied to Turkey's economic data. The findings have shown that short term interest rates are more sensitive to the inflation change during high inflation and low output gap regimes. Moreover while Turkey's economy is experiencing high inflation regimes, the effect of output gap on short term interest rates is maximized.