Mitigating Turkey's Trilemma Tradeoffs

Mitigating Turkey's Trilemma Tradeoffs

Title : Mitigating Turkey's Trilemma Tradeoffs
Number : 12/29
Author(s) : Yasin Akçelik, Orcan Çörtük, İbrahim M. Turhan
Language : English
Date : October 2012
Abstract : 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 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.
Keywords : Trilemma, Impossible Trinity, Required Reserves, International Reserves, Central Bank Policies
JEL Codes : E44; E58; F39; F41

Mitigating Turkey's Trilemma Tradeoffs
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