The advent of global financial crisis in 2008 unleashed volatile short-term capital flows to the emerging markets. This has
forced many central banks in the developing world to adopt innovative policy measures to address concerns related to financial
instability caused by the volatile nature of capital flows. In 2010 the Turkish Central Bank included financial stability
in addition to price stability as one of the primary goals of its monetary policy. Several macro-prudential measures had been
taken and "corridor system" of setting the short-term policy rates had been introduced. In this paper, we have estimated an
extended Taylor rule, using error correction model, to examine the impact of global financial factors in impacting the setting
up of the policy rate in the pre and post 2010 periods in Turkey. It has been found that in the post-2010 period, global financial
factors and monetary policy stance of the core economy, USA, have become major factors in shaping up the monetary policy.
Particularly our results of variance decomposition show that global financial indicators such as VIX and EMBI have taken prominence
in the setting of the short-term policy rate. This has not only made the domestic monetary policy more dependent on external
factors but has also made it pro-cyclical in nature.
Forschungsbereich:Makroökonomie und europäische Wirtschaftspolitik