Friday, October 14, 2016: 3:15 PM
Many central banks that have opted for monetary autonomy have also been reluctant to relinquish control over the value of their currencies. As a result, they have operated through both interest rate and foreign exchange interventions. However, in the context of the monetary trilemma, both effects can potentially offset each other. Using daily data from the Central Bank of Turkey during the period of 2002 - 2010, we study the effects of simultaneous policies by first purging the intended monetary decisions from responses to real-time macroeconomic variables, and then determining their impact on economic activity, including inflation, output growth and exchange rate behavior. We find that the Central Bank of Turkey (CBRT) adjusted its policy rate mostly in response to inflation levels relative to both the yearly target and agents' expectations, and conducted purchases and sales of foreign currency in response to exchange rate behavior. These responses varied depending on whether interventions were pre-announced. A key feature of our identi cation strategy consists of matching the actions of monetary authorities with stated targets and observable covariates. In other words, we closely observe what monetary authorities observed, and capture their direct undertakings, especially with a clear timing pro le. To this end, we employ proprietary data from the CBRT, comprising all direct sales and purchases of foreign currency as well as changes in the intended policy rate. In terms of effectiveness, we find that unannounced purchases of foreign currency had a significant effect in reducing exchange rate volatility but appeared to have no effect on exchange rate changes. Announced interventions, on the other hand, did have a significant impact on exchange rate changes and volatility. Finally, we find that changes in the policy rate affected inflation and output growth, with a lag-delay of four and two quarters, respectively.