The view of Sargent and Wallace on monetary policy: tight monetary policy does not stop inflation: an evaluation of CBRT's monetary policy for 1987-2002

Abstract

This study analyzes the effect of monetary policy on inflation by using Sargent and Wallace's approach. Their assumption is that tight monetary policy is more inflationist than the loose monetary policy in a condition which the public has to borrow. Then, the monetary policy implemented by Turkish Central Bank (CBRT) between 1987 and 2002 is evaluated. It is concluded that CBRT assisted in the rise of inflation by implementing tight monetary policy from 1987 to 1997, and it contributed to the fall of inflation by following relatively loose monetary policy after 1997. Moreover, since the money generation process of CBRT is subject to the foreign assets, it is revealed that CBRT does not have a monopoly power in controlling the inflation rate. (C) 2004 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.