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The authors would like to thank Alex Hoffmaister, Juha Kähkönen, and participants in the European I Department internal seminar for helpful comments and suggestions. The usual disclaimer applies. Daniel Leigh, Johns Hopkins University, was Summer Intern at the IMF when the paper was prepared.
Under the 1999 IMF-supported program, the Central Bank of Turkey (CBT) intended to introduce inflation targeting (IT) in 2002 as the exchange rate band widened and control of domestic monetary conditions improved. The crisis in February 2001 and the introduction of the float left the economy without a nominal anchor, underscoring the importance of moving toward IT promptly. Preparatory work was speeded up with a view to introducing IT by end-2001. Amid financial turbulence in the aftermath of September 11, the CBT felt, however, that additional time was needed to prepare for IT. The CBT has recently announced that the adoption of IT is likely to be delayed until 2003.
In a companion paper, Leigh and Rossi (2002) look at the exchange rate pass-through as an additional source of information to assess underlying inflationary pressures.
For instance, Stock and Watson (2001) examine evidence from Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
Stock and Watson (2001) avoid the problem of fitting too complicated a model by calculating simple linear bivariate forecasts and taking their median.
See Diebold and Lopez (1995) for an extensive review of forecast evaluation and combination.
Standard errors for this relative MSFE can be computed following the Diebold and Mariano (1994) or West (1996) procedures. However, the data requirements for these tests are high, needing a long series of predictions based on regression estimates obtained from long time series. Due to limited data availability, the simulated out-of-sample periods are rather short in this paper and we do not report standard errors for the relative MSFEs.
The standard errors (and 95 percent confidence intervals) for these estimates are large.
The forecasts of the level of CPI inflation are computed using the predictions of the change in the inflation rate discussed above. To each forecast of