Trilemma Triangle and Macroeconomic Policy Preferences in Turkey

This study investigates the validity of the trilemma hypothesis and various trilemma policy configurations among the exchange rate stability, financial openness and monetary autonomy in Turkey covering the period of 1970-2014. Trilemma policy measures are obtained from Aizenman, Chinn, and Ito (2013). Estimation results confirm that trilemma constraint is binding, and the policy-makers in Turkey pursue a policy combination of capital mobility and monetary autonomy between 2001 and 2014. More importantly, growing international reserves at the same period gave CBRT more self-confidence to violate trilemma constraint and pursue more stable exchange rates. This result potentially explain why Turkey has been accumulating international reserves in parallel with rising deviations from the trilemma constraint.