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Policy Predictability for Central Banks in Emerging Market Economies

Policy Predictability for Central Banks in Emerging Market Economies. Erdem Başçı Deputy Governor Central Bank of Turkey. Challenges for EM Central Banks. Balassa Samuelson effect (and a general appreciation trend) – Dr Buiter Data availability and learning for Central Banks– Dr Gürkaynak

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Policy Predictability for Central Banks in Emerging Market Economies

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  1. Policy Predictability for Central Banks in Emerging Market Economies Erdem Başçı Deputy Governor Central Bank of Turkey

  2. Challenges for EM Central Banks • Balassa Samuelson effect (and a general appreciation trend) – Dr Buiter • Data availability and learning for Central Banks– Dr Gürkaynak • Learning and adaptive behavior of private agents – Dr Kara

  3. Other Challenges • High exchange-rate pass-through: due to high dollarization. • Sudden stops: less of a problem under a floating exchange rate regime. • Fiscal dominance: less of a problem under debt reduction.

  4. Policy predictability: The case of NZ Source: Archer (2004)

  5. Policy predictability: The case of TR • Constant at 13.50% in the first couple of months, gradual easing afterwards (Inflation Reports 1 and 2). • Tight at or above 17.50% until end of 2006, gradual easing afterwards (Inflation Report 3, published after the global sell-off in May-June 2006).

  6. Summary • Inflation targeting (IT) is here to stay. • Policy predictability (PP) is low even under fully transparent IT in pioneer central banks. • PP is, naturally, lower in emerging market economies. • Risk awareness is a ‘public good’ that Central Banks should provide.

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