Economic Status of Turkey
Monetary Policy is defined as changes in the money supply in order to achieve macroeconomic goals. Banks create money by lending money. The most important role of the Central Bank is to control the money supply. Three major tools used by the Central Bank to control the money supply are 1) open market operations, 2) required-reserve ratio and 3) the discount rate. Monetary Policy can be expansionary with banks having more money to lend causing the aggregate demand to increase. Monetary Policy can also be contractionary with banks lending less money causing the aggregate demand to decrease.
Current Monetary Policy - Expansionary
According to Today’s Zaman, Turkey’s monetary policy is expansionary with the Central Bank of Turkey lowering the reserve requirement from six percent to five percent. The reduction in reserve requirement has created money by freeing up approximately Turkish Lira 3.3 billion available to be loaned out by the banks (www.todayszaman.com). The banks have also invested in government securities, which are known as Open Market Operations (OMOs). Banks prefer to use OMOs in monetary policy because they are flexible making the OMOs easy to sell or purchase, and the transaction takes place quickly.
Anticipated Effects of Expansionary Monetary Policy
The anticipated result of Turkey’s monetary policy is that by lowering the reserve ratio, banks will have more money to lend to consumers and businesses causing the aggregate demand to increase which in turn could possibly increase the aggregate supply depending on whether or not businesses will borrow more money to spend it to increase their production. This lowering of the reserve ratio will impact the macroeconomic goal of stable prices by keeping the current inflation rate of 6.5% unchanged. It will also impact the goal of low unemployment by decreasing the current unemployment rate of 14.6% and increasing the real GDP with the hopes of stimulating the current shrinking real GDP rate of -5.8%.
According to Neylan, Turkey’s banks have practiced sound “lending and borrowing policies” and are not on the list of troubled banks (www.todayszaman.com). However, with the current economic conditions, consumers are wary of the conditions and could possibly be less likely to want to become encumbered with debt. Only time will tell if the strategy of lowering the reserve ratio will positively affect the Turkish economy resulting in an increased GDP.
According to Neylan, Turkey’s banks have practiced sound “lending and borrowing policies” and are not on the list of troubled banks (www.todayszaman.com). However, with the current economic conditions, consumers are wary of the conditions and could possibly be less likely to want to become encumbered with debt. Only time will tell if the strategy of lowering the reserve ratio will positively affect the Turkish economy resulting in an increased GDP.
