Misspecified expectations in an open economyYusuf Ömür Yılmaz and Cumhur Çiçekçi Economic Analysis and Policy, 2024, vol. 82, issue C, 65-85 Abstract: In the past two decades, Turkey has experienced multiple changes in its monetary policy regime. To analyse how these policy changes affect the behaviours of households and firms, some behavioural parameters are incorporated into a small open economy New Keynesian model. Our approach consists of four phases. First, we assess the impacts of the behavioural parameters on the model and find that higher values of the parameters increase the effects of expectations on the model. Second, for the period between 2006 and 2021, the model is estimated for the Turkish economy and the findings show that both households and firms are more forward-looking in their decision making. Moreover, the current variables have a weak effect on the nominal interest rate, and the inertial nominal interest rate has a strong effect on it. Third, we analyse the evolution of the model parameters over the period and find that the behavioural parameters tend to increase, while the monetary policy becomes more inertial. Finally, we conclude that the Central Bank should follow Domestic Inflation-based Taylor rule to minimise welfare loss. Keywords: Behavioural New Keynesian; Cognitive bias; Inflation targeting; Turkish economy; Inflation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:82:y:2024:i:c:p:65-85 DOI: 10.1016/j.eap.2024.02.024 Access Statistics for this article Economic Analysis and Policy is currently edited by Clevo Wilson More articles in Economic Analysis and Policy from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.