Moreover, there are studies elaborating on the role of base effects on consumer inflation in 2015, the debt dollarization of companies in Turkey and their growth performance, the macroeconomic effects of international energy prices and the reverberations of remuneration of required reserves. Titles of the boxes are shown on the slide. All of these analyses shed light on noteworthy issues in the Turkish economy. I strongly recommend that you read these boxes, which will soon be published on our website. I would like to commence my speech by reviewing the global economic outlook given its undeniable influence on our policies. In the fourth quarter of 2014, due to the persisting divergence among global monetary policies besides uncertainties regarding the normalization process, we saw aggravated volatility in financial markets. This led the portfolio flows towards emerging economies to fluctuate and the volatilities of exchange rates in these countries to increase (Chart 1). The persisting deterioration in global economic activity accompanied by mainly supply-side factors has recently pulled down oil prices sharply. These developments caused considerable fluctuations especially in energy-exporting emerging countries. Overall, the risk premia of emerging economies followed a volatile course due to the monetary policy uncertainties, the slowdown in economic activity and the course of oil prices (Chart 2). Effects of this volatility in global markets emerged in the Turkish economy as fluctuations of risk premium indicators and exchange rates. The fall in commodity prices, chiefly in oil, is expected to improve the economy especially in terms of inflation and external balance.

In that setting, credible guidance that depresses those forward real rates can therefore be an effective way of boosting demand and combatting the risk of deflation. Chart 4, based on simulations with a simple (and pretty standard) model of the economy, gets the point across. Chart 4. The ability to commit credibly to future policy helps soften the effects of the lower bound  Results from a simulation of a small macroeconomic model under alternative assumptions about monetary policy and the average distance to the lower bound. Macroeconomic volatility is measured using a simple “loss function” that weights the variance of inflation and the output gap. The y-axis shows the square root of the loss function, scaled to 1 for the case of commitment policy with an average distance to the lower bound of 5pp. Sources: See Appendix for further details. What we’ve done is to hit this simple model economy[9] with lots of simulated shocks and measure how far it is, on average, from meeting the central bank’s objectives – keeping inflation close to target and output close to potential. (A simple measure of this, based on a  “loss function” that weights together the variances of the output gap and inflation, is plotted on the y-axis. Note that the perfect score of zero isn’t attainable. Because there are so-called “trade-off-inducing” shocks in the model, things that push the objectives in different directions, inflation and demand can’t both be perfectly stabilised[10]). We’ve plotted this performance while varying two key things.