Hafize Gaye Erkan, the chief of the Turkish Central Bank, resigned yesterday unexpectedly, citing personal reasons. The Finance Minister stated that this was due to purely personal reasons, and would have no impact on the policy plans. Erkan was appointed 9 months ago, starting a U-turn in Turkish monetary policy, as President Erdogan let go of his policy of keeping interest rates low in the face of soaring inflation. The Central Bank since has increased rates drastically, bringing inflation down. However, monetary policymakers were criticized by some economists for not being hawkish enough, as the spread between the policy rate and the market rates was very wide. The decrease in inflation was unsatisfactory in the eyes of many. With the upcoming local elections, the new chief of the bank will need to balance decreasing inflation with keeping employment high, under political pressure.
Who is the new the new central bank chief?
Fatih Karahan was appointed shortly after Erkan's resignation. Karahan is a Bogazici and UPenn-educated economist, who's also been faculty at Columbia. He also has experience working for the New York Fed, and Amazon, where he was principal economist.
How will this affect economic policy?
The appointment of the new central bank chief will likely not have a drastic impact on the Turkish economy, as the finance minister said the "Middle-Term Plan" will be carried out strictly.
Even though the impact of this change on monetary policy going forward is yet to be seen, the markets and most economists seem to believe it will not have a significant impact on the monetary policy framework.
The last three changes of the chief economist were followed by policy U-turns, and they significantly weakened central bank independence in Turkey. This weakening of the monetary authority is likely to have long-lasting negative impacts on Turkey's Phillips curve, as research shows central bank independence correlates highly with a more favorable tradeoff between low inflation and high employment. Even though the current monetary agenda is considered to be correct by many, the long-term U-turn for Turkish monetary policy should be restoring the strength and independence of the Central Bank. This is the only way Turkey can achieve monetary stability and restore investor confidence fully.
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