Abstract
This article compares and contrasts the macroeconomic effects of exchange rate targeting and money supply targeting by using quarterly data from Turkey for the period February 1986–March 2000. The results of the VAR analysis show that the exchange rate does not have the traditional ‘hump-shaped effect’ that money supply has on output. In addition, we observe that an exchange rate depreciation leads to a temporary improvement in the trade balance for only a year, while monetary innovations have longer-lasting effects. Those results suggest that money-based targeting is more appropriate than exchange-rate targeting for Turkey.
Acknowledgements
The authors would like to thank Faik Koray, Katy Nichols, Susan Moyle, Dek Terrell and an anonymous referee for their valuable suggestions. All errors, of course, are our own.
Notes
1 Avsar and Gur (Citation2004) show that the inflation in Turkey was on an increasing trend during 1988–1996, while it started to decline thereafter.
2 Choosing the lag length based on AIC is also recommended by previous literature, including Kilian (Citation2001).