Abstract
I The purpose of this study is to explain and discuss the costs and effects of the rules versus discretion monetary policies both on theoretical grounds and in the context of banking industry. The study consists of three parts. I The first part reviews the recent literature on the rules versus discretion debate in monetary policy. This debate is least 150 years old. It is injiportant to distinguish between activist policy rules an discretionary- policy. Activist policy rules involve feedback from the state the economy to the policy inistrument, but the feedback is part of the rule. Sometimes the term passive policy rule is used to refer to special rules without feedback, like the fixed growth rate rule for the money supply. Discretion policy is formulated on a case- by-case and year-by year basis with no attempt to commit to or even talk about future policy decisions in advance. Most economists today support activism in the conduct of monetary policy because the believe that output sometimes departs significantly from frill emplayment levels and they are confident in the effectiveness of discretionary monetary policy. However many economist are dubious of the proposition that thç central bank can contribute to economic stability through discretionary policy. Two groups economist who believe the central banks should abandon discretionary monetary policy. These schools of thought include monetarism and nelw classical macro economics. Milton Friedman after echoing Simons point of principle, develop a framework in which fiscal and monetary policy would operate automatically. - Friedman raised the question of whether long and variable lags in the operation of might case the active countercyclical policy of the framework to be destabilizing. He argued that central bank has frequently been a source of economic instability. Friedman advocated the rule that growth rate of money be held constant. Arguments for a fixed money growth rule involve: - Elimination of a destabilizing agent, - A clime of confidence, - A reduced role for government, - Elimation of political scape goating. In this context, monetary policy uncertainty involves effects of uncertainty about monetary policy and it is association higher expected inflatiön.Monetary policy uncertainty results from central bank secrecy and change in operating regimes of monetary policy. Most economists believe2 monetary policy uncertainty may have a negative effect on output stabilization and therefore olso on society's welfare. The second part reviews banking industry under monetary policy uncertainty. Since monetary policy uncertainty creates inflationary bias and banks deal largely in nominal financial instruments, a change in the rate of inflatjion may significantly affect the real value of their assets and liabilities. Theorically it is well known, inflation is divided in two parts: anticipated and unanticipated inflation. An increase in anticipated inflation is fully anticipated, banks can price their assets, but if the realized rate of inflation exceeds the anticipated rate, the price level has risen unexpectedly. The unexpected increase in the price level causes a proportional reduction in the exchange value of both nominal financial assets and liabilities in term of real goo#s. The third part evaluates the impact of unexpected inflation on the Turkish commercial banks. In this part, firstly, we model inflation uncertainty in Turkey. This model is developed based on M.Bruno model outlined in chap-ter - 3 and covers the period from 1990:03-2002:06. After finding out inflation uncertainty, we set up another model that includes RAO,ROE about Turkish banks and inflation uncertainty. This model estimates the impact of inflation uncertainty on the ROA and ROE of the commercial Turkish banks. The evidence in the study shows that inflation uncertainly has a significant effect on commercial Turkish banks.
