Estimating Monetary Policy Reaction Function for Central Bank of Turkey

There is a famous debate about whether monetary policy follows a rule or discretion which was started a century ago. The mile stone is introducing the Taylor rule. After that, this rule has adapted to the developing countries. In this study, Taylor type rules are validated for Turkish economy. ARDL approach is employed because of unit root test results. According to the results some of variables are stationary, others not. It found that modified Mohanty-Klau model is best for the explaining the behavior of Turkish central bank. In the short run, a change in reel exchange rate has also substantial effect on interest rate. Moreover, while Turkish Central Bank makes decision about interest rate, output gap is ignored means that the priority of the central bank is price stability