Political Risk and Monetary Policy: A Case Study of Turkiye

Political risk can be defined as political volatility and instability in the domestic as well as the international front, which may impact a certain country. The impact and effect of political risk on the economic stability and monetary policies of a country cannot be ignored, as an increasingly politically volatile environment can inevitably hit the markets and thus the stability of the financial stage, which pushes financial institutions to address the issues via monetary policies. This paper is focused on understanding the correlation between political risk and instability and monetary policy, with a specific focus on Türkiye during the 2010-2020 period. This period is deliberately selected as a time of profound political developments and volatility in Türkiye, as well as very impactful economic and financial reforms and transformations. The primary focus on understanding the role of political risk on monetary policy will be through analyzing the inflationary spikes and the policies of the central bank. The findings of the paper portray the importance of political stability in both domestic and regional sense, highlighting the impact that increased political risk may have, while at the same time, demonstrating the effectiveness of the monetary policies already undertaken, as the political risk levels steadily increased. While the paper clearly shows a correlation between political risk and monetary policy, the importance of strong financial institutions and decisive policy decisions is also highlighted as a way to mitigate the impact that political risks may create.