Does Time Inconsistency Problem Apply for Turkish Monetary Policy

Abstract

We analyze the implications of the time inconsistency problem for the Turkish monetary policy in the last two decades. After deriving the restrictions that the Barro and Gordon model imposes on a time series model for inflation and output, we show that the time inconsistency problem can explain both the short-run and the long-run behavior of inflation and output in the Turkish economy. The results also reveal that the Turkish monetary policymakers have put more emphasis on output stability than price stability in the last decade.