Servant of the People or Slave to Global Finance? Unpacking the Post-Crisis Policy of the Turkish Central Bank

From the early 1980s until the 2008 Global Financial Crisis, the central banking orthodoxy defined price stability as the primary goal of central banks and championed their independence from government influence. Scholars argue that the rise of independent central banks in the last three decades has been pivotal for the institutionalization of financial globalization, and their policies are influenced by and benefit the global financial community.

The Global Financial Crisis turned this central banking orthodoxy on its head. Since 2008 central banks in several developed and developing economies have begun to experiment with unorthodox monetary policies. These policies are increasingly detached from the singular goal of price stability, and with varying degrees of emphasis, focus on promoting domestic employment, economic growth and ‘financial stability’. While they were thrust upon central banks with the global meltdown, the financial crisis prompted fierce public debates about the role of central banks in the economy.

Despite the transformative potential of the financial crisis on the role of central banks, the rationale behind the design and implementation of unorthodox monetary policies has not been carefully examined. To address this gap, this paper examines the post-crisis policy of the Turkish Central Bank (CBT). CBT was among the pioneers to implement an unorthodox monetary policy framework. Through an analysis of this framework, this paper examines how the financial crisis has changed: (1) the incentives of central bankers; (2) their policy options and how they perceive the feasibility, desirability and credibility of economic growth-oriented policy; and (3) the constraints under which they make their policy decisions.

This paper finds that the post-crisis expansionary policies of ‘major’ central banks (e.g. Fed, ECB) posed a threat to the financial stability of emerging markets due to massive capital inflows into these economies searching for higher yields. Turkish central bankers designed the new framework to address this challenge. CBT’s policy was unprecedented because of the strategic use of uncertainty as a major policy tool. By internationally making their policy decisions unpredictable to financiers and ‘surprising’ them, central bankers aimed to deter hot money inflows and mitigate domestic financial crises. While this curbed the rapid appreciation of the Turkish Lira, and supported exports and economic growth, central bankers claim they were not intending to act as ‘agents of development’.

The policy provoked intense criticism among the financial community. CBT was able to withstand these pressures for two reasons. First, abundant global liquidity loosened the constraint on central bankers’ policy options. Second, the character of the Turkish financial sector weakened the ties between the global and domestic members of the financial community and reduced their “situational power” (Chorev 2007). Yet, interviews also reveal that CBT might be pushed to make its policy predictable and ‘follow the financial markets’ as the pressure to attract capital inflows heightens with the ‘normalization’ of major central banks’ policies. These findings are based on qualitative data from public texts and over sixty semi-structured interviews with Turkish central bankers and members of the financial community in Istanbul and London.