One Goal, Two Outcomes: Norwegian and Turkish Inflation Targeting Case Study

In a positive turn of events for the Turkish people, yearly inflation reached the lowest it has been in 4 years: 33.5%. This might seem like a laughable accomplishment, but given the turmoil of the Turkish Lira over the past decades, it is a huge positive step. In complete opposition to this, the Norwegian Central Bank (Norgesbank) is making waves for their portfolio choices, in part because their portfolio is the largest sovereign wealth fund in the entire world. While this is impressive for such a small country, even more impressive is their monetary stability even while completely independent from larger currencies. While Norway is 119th in the world in population, it is the 13th most traded currency. These two completely different pictures actually arise from both countries pursuing the same goal. Both countries have central banks who are legally required to hold monetary stability as their highest aim. The extreme differences in how they went about this goal underlie their resulting outcomes. 

Even from the beginning of Turkey’s inflation targeting regime in 2001, motivation was far more foggy than the Norwegian Central Bank. While the Turkish Central Bank regulations claimed that: “The Law explicitly defined the primary objective of the Central Bank as to achieve and maintain price stability” it also claimed that “achieving financial stability was described as a complementary objective of the Bank.” While this might not seem dangerous, the second goal became elevated beyond its complementary status. While financial stability would be greatly aided by monetary stability, pursuing financial stability alone could greatly harm monetary stability. The inclusion of “financial stability” as a goal later allowed Erdogan to take advantage of the bank and increase inflation. The Norwegian Bank much more clearly recognizes its sole goal: to promote monetary stability. In bold font on the main page of their website they proclaim: “Monetary policy shall maintain monetary stability by keeping inflation low and stable.” Trying to pursue too many goals at once makes a central bank perform poorly at all of them, and the Norgesbank has succeeded through pursuing low inflation single-mindedly. …