Impacts of Global Financial Crisis and Changes in Monetary Policy of Central Banks: An Analysis of Central Bank of the Republic of Turkey (CBRT) and Bank of Israel (BOI)

Impacts of Global Financial Crisis and Changes in Monetary Policy of Central Banks: An Analysis of Central Bank of the Republic of Turkey (CBRT) and Bank of Israel (BOI)

İsmail Şiriner, Keremet Shaiymbetova
DOI: 10.4018/978-1-5225-0053-7.ch021
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The Great Financial Crisis (GFC) has hit developed and developing countries through a number of transmission channel. Some impacts are already disappearing while others are still to strike. In MENA region developing countries to experience the crisis were those with the most globally integrated financial sectors. Next came the impact on trade, as volumes and prices of commodities and manufactures collapsed across the globe. Successful economic policies pursued in the past do not promise these countries' immunity from the crisis. In fact, some MENA countries have already shown a limited capacity to learn from other countries' previous financial crises. Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for Turkey and Israel in MENA economies. This paper analyzes the review of the region's monetary regimes and policies, including: monetary policy expansion of the monetary policy framework in promoting financial stability alongside the primary price stability objective.
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After the Great Moderation Process of the world economy, financial system and real economies face to unexampled crisis (Great Financial Crisis). The GFC has hit developed and developing countries through a number of transmission channels. Some impacts are already disappearing while others are still to strike. It has caused unique responses from central banks of most affected developing and advanced economies. Central banks and supervisions of the economies had to create new framework and unconventional instruments for monetary policy, which have headed to deviations in central banks’ balance sheets, and to arrangements designed for leading expectations concerning long-term interest rates.

During and after GFC recent literature points out a huge number of studies, which examine batten down the hatches by central bank under the monetary policy in many economies as a part of GFC. The GFC has highlighted important shortcomings of the literature on monetary policy, and in particular, huge cavities in the forming of interconnection among the financial system and macroeconomic policies.

Even before the crisis, most central bankers understood that financial disruptions could be very damaging to the economy. This explains the extraordinary actions that central banks took during the crisis to shore up financial markets (Mishkin, 2011). Post-crisis period has brought emerging consensus that financial stability should be an objective of central banks. But, on the contrary opinion remains divided as to what extent it can be considered as an additional objective of monetary policy or completely separated. It is argued that the monetary policy horizon for achieving the inflation target could be lengthened to facilitate taking into account the financial stability concerns. IMF (2010) emphasized that in adopting such an approach, central banks need to lookout against the persistent deviations of inflation which may otherwise dilute policy accountability and create uncertainty of the long-term commitment to price stability.

The view that monetary policy should allow policymakers to lean against the building up of financial imbalances, even if short-term inflation expectations remain anchored, appears to be gaining ground. The balance of views within the central banking community has been shifting in this direction (Cagliarini, Kent & Stevens, 2010; Carney, 2009; Fischer, 2011; Shirakawa, 2009; Trichet, 2009; & Woodford, 2010). However Mishkin (2009, pp. 12-23) argued that the ineffectiveness of the monetary policy during financial crises is not only wrong, but it may also promote policy stagnancy in the face of a severe contractionary shock. To the contrary, monetary policy is more effective during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely.

This paper highlights the main effects of GFC on the monetary policy and central banks behavior. We focus on monetary policy implementations by the Central Bank of the Republic of Turkey (CBRT) and Bank of Israel (BOI) that helped to temper the impact of the global financial crisis and as a result that mitigated the shocks to the economies of these countries. The paper is structured as follows: first the confront conditions of GFC and compulsory monetary policy development under financialization of the world economy is analyzed, then we summarize the changes in monetary policy caused by GFC from inflation targeting to financial stability, from financial stability to macroprudential polices which is named generally as unconventional monetary policy measures. A last study examines the main structure of “new” monetary policy and implementations of Monetary Policy by BOI and CBRT.

Key Terms in this Chapter

Kemal Dervis: When Dervis became Turkey’s minister of economic affairs in March 2001, after a 22-year career at the World Bank, the country was facing its worst economic crisis in modern history and prospects for success were uncertain. Dervis used his independence from domestic vested interests and support of domestic reformers and civil society to push through a tough stabilization program with far-reaching structural changes and sweeping bank reforms that protected state banks from political use. Dervis also strengthened the independence of the central bank and pushed through deep structural reforms in agriculture, energy and the budget process. These reforms, and his reputation and top-level contacts in the U.S. and Europe, helped him to mobilize $20 billion in new loans from the International Monetary Fund and the World Bank. Rapid economic growth resumed in 2002 and inflation came down from an average of nearly 70 percent in the 1990s to 12 percent in 2003; interest rates fell and the exchange rate for the Turkish lira stabilized.

Macroprudential Policy: A method of economic analysis that evaluates the health, soundness and vulnerabilities of a financial system. Macroprudential analysis looks at the health of the underlying financial institutions in the system and performs stress tests and scenario analysis to help determine the system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.

Interest Rate Corridor: Refers to the window between the repo rate and the reverse repo rate wherein the reverse repo rate acts as a floor and the repo as the ceiling. Ideally, rates in the overnight interbank call money market, where lending and borrowing is unsecured, should move within this corridor.

Exchange Rate Channel: The exchange Rate is one of the intermediate policy variables through which monetary policy is transmitted to the larger economy through its impact on the value of domestic currency, domestic inflation (the pass-through effect), the external sector, macroeconomic credibility, capital flows, and financial stability.

Asset Price Channel: Is the monetary transmission channel that is responsible for the distribution of the effects induced by monetary policy decisions made by the central bank of a country that affect the price of assets.

Balance Sheet Channel: This channel of monetary policy transmission refers to the role the financial position of private agents plays in the transmission mechanism of monetary policy. It arises because the shifts in policy affect not only market interest rates but also, the financial position of private economic agents because changes in interest rates affect bank balance sheets, cash follows and the net worth of companies and consumers. Higher interest rates result in reduced cash flow, reduced net worth, drop in loans, and decline in aggregate demand.

Unconventional Monetary Policy: The widely used approach to evaluating the macroeconomic effects of unconventional monetary policy is the ‘plug-in’ approach, which uses estimates of the impact of unconventional policy measures on asset prices to plug them into standard macroeconomic models

Liquidity Policy: Is designed to ensure that there are sufficient funds available to meet payments, transfers and withdrawals for bank’ members

Microprudential Policy-: or Microprudential Supervision: Refers to firm-level oversight or financial regulation by regulators of financial institutions, “ensuring the balance sheets of individual institutions are robust to shocks”

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