Turkey' Trilemma Trade-offs: Is there a role for reserves?

In this paper, we empirically investigate the Mundell-Fleming theoretical concept of an "impossible trinity" (trilemma) for Turkey, following the Aizenman, Chinn and Ito approach. However, we also introduce alternative empirical techniques in order to deal with possible misspecification problems that we detect in the mentioned approach. Accordingly, we show that financial integration and monetary independence have increased from late 1990s to 2010, with corresponding limitations on exchange rate stability. Our analysis continues by exploring the implications of changes in the trilemma indices for inflation in a regression in which we find that trilemma indices have certain impact on inflation. Finally by introducing international reserves (as a percentage of GDP) to the equation, we also attain role for international reserves on decreasing inflation conditional upon it is above a certain threshold.