When the course of medium-term inflation expectations is analyzed, it is observed that the expected inflation continues to remain well below the actual inflation figures although inflation had clearly remained above the target level for quite some time. When considering the period of high inflation levels experienced by Turkey in recent years, one of the most significant achievements of the inflation-targeting regime has been its success in managing expectations in a time of extraordinary shocks. Operational framework for monetary policy Inflation targets Inflation targets have been set jointly with the Government as “point target” since 2006, over the end-year inflation rates calculated by the annual percentage change of the Consumer Price Index (CPI) for a target horizon of three years. As mentioned above, targets for the next three-year period were announced during the revision in June 2008. Within this framework, inflation targets for 2009, 2010 and 2011 are 7.5 percent, 6.5 percent and 5.5 percent, respectively. Accountability In the first three-year period of the inflation-targeting regime, the Central Bank explained the reasons for deviations from inflation targets and policy measures taken with open letters sent to the Government, and hence meticulously applied the principle of accountability. Gradually, Inflation Reports also became a significant support to the accountability mechanism.
And third, how to compensate for the democratic deficit of technocratic monetary policy decision-making. Concerning the first issue, empirical research has found out that greater central bank independence is on average associated with lower inflation, but not with higher volatility. This “free lunch” was a bit surprising in the light of the “conservative central banker theory”. It reflects the fact that the actual institutional and policy design has evolved over time to guarantee that the mandate to achieve low inflation is not interpreted rigidly. In fact, most central bankers pay attention to real economic developments in their policies. In the last decade, this fact has been formally and institutionally reflected in the “flexible” inflation-targeting regime. This regime is often described as “constrained discretion”, meaning that it aims at making the monetary policy-making constrained by understandable procedures and at the same time flexible in responding to unforeseen shocks. As far as the democratic deficit is concerned, this issue has been addressed by moving to greater transparency and accountability of central banks. The burden of proof in central banks’ communication has shifted over the last two decades. At present, it is necessary to give convincing arguments if one thinks that the central bank should not give out some information, rather than to argue why something should be revealed. This has been a significant shift in the central banks’ mentality. Regarding the issue of communication and co-operation between the central bank and government, no universal solution has been found so far.