Document Type



Doctor of Philosophy (PhD)



First Advisor's Name

Hakan Yilmazkuday

First Advisor's Committee Title

Committee Chair

Second Advisor's Name

Cem Karayalcin

Second Advisor's Committee Title

Committee Member

Third Advisor's Name

Mihaela Pintea

Third Advisor's Committee Title

Committee Member

Fourth Advisor's Name

Laura De Carli

Fourth Advisor's Committee Title

Committee Member


Inflation Targeting, Foreign Exchange Intervention, Monetary Policy Credibility, Exchange Rate Pass-Through, DSGE, Trade Costs

Date of Defense



A sound monetary policy depends on a solid understanding of how external shocks reverberate throughout the economy. This is particularly true in emerging market economies under the inflation targeting (IT) framework since these economies tend to be subject to large external shocks, and don't have a long IT track record. My dissertation studies the macroeconomic consequences of external shocks under IT in emerging market economies, and the policy response to such shocks.

The first chapter studies whether foreign exchange interventions (FXI) are effective under IT in the context of commodity prices shocks. It also explores the extent to which lack of public confidence in the central bank's ability to meet its inflation objectives may frustrate the success of FXI. Using an interacted panel vector autoregression framework, I find that, when the central bank fights simultaneous appreciation and inflationary pressures driven by positive commodity price shocks, FXI indeed leads to less exchange rate appreciation. However, lack of credibility – reflected by the (de-)anchoring of inflation expectations – can undermine a central bank's FXI effort since less credible central banks increase interest rates more aggressively to stabilize inflation. The simultaneous effort to depreciate the currency is thus weakened in the presence of higher rates.

The second chapter investigates the implications of international trade costs shocks for exchange rate determination under different inflation targets. Using a dynamic stochastic general equilibrium model I show that, given a shock to international trade costs, the nominal exchange rate exhibits higher volatility under higher inflation targets. The results suggest that monetary policy authorities should choose inflation targets with caution, especially in a context of uncertainty regarding international trade costs.

The third chapter empirically estimates the extent to which changes in the exchange rate induce changes in the prices of imported agricultural goods in Turkey. I show that agricultural commodities have a low and incomplete exchange rate pass-through. The results suggest that Turkish monetary policymakers may allow nominal exchange rate fluctuations to stabilize real activity without having to worry about a spike in CPI inflation induced by higher import prices.






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