Inflation Targeting And The Impact Of Public Dynamics On The Adaptation Of Inflation Targeting In Turkey

Abstract

One of the most significant developments in the theory and practice of monetary policy in recent years has been inflation targeting. The initial conditions in support of an inflation targeting framework can be divided into three groups. First condition is the independence of central bank. Second condition that monetary policy should not be dominated by fiscal policy. Third condition that the financal system should be sufficiently well-developed and stable enough to implement the framework. In a inflation targeting regime, there is also an implicit interaction between the goals of monetary and fiscal policy. Fiscal policy and public debt management activities should be coordinated in support of the inflation targeting. An excessively large stock of public debt may create expectations of future inflation which make it more difficult for the central bank to achieve the inflation target, the resultant higher interest rates may also increase the debt servicing burden for the government and add to the stock of debt resulting in vicious circle of higher interest rates and higher debt.