The monetary transmission mechanism in Turkey: new developments

2014

The main objective of this study is to provide additional evidence on the operation and relative importance of monetary transmission channels in Turkey. The results of the VAR analysis conducted using monthly data between January 2004 and November 2013 suggest that the traditional channels of interest rates, exchange rates, and credit do work in Turkish economy. However, the most striking finding of the study is the relative importance of exchange rate channel in the transmission of monetary policy decision into real economy. Variance decomposition analysis shows that the explained variance by real effective exchange rates is higher for all variables as compared to the variance explained by interest rates. However, interest rates seem to be still a useful tool to manage monetary policy given its role in controlling the changes in exchange rates. The granger causality analysis points into the fact that while interest rates have a role in leading the volatility of exchange rates, exch...

Eastern Journal of European Studies, 2019

Previous studies have examined the monetary policy relationship among relatively similar size countries in terms of their economic development. It is also important to explore this relationship between developed countries and developing economies. Moreover, another important question which should be asked is whether the relationship exists among developed and developing economies and what would the size and sign of the coefficient be. Our contributions to existing literature sit on this line. To begin with, we test whether the Taylor rule exists in Turkey or not. First of all, we proved this relationship exists in Turkey. Then, this study concludes that developed countries have a greater impact on developing countries' monetary policies. Moreover, it is found that the effect of the European Central Bank's (ECB) on the monetary policy authority of the European Union related to interest rate over the foreign exchange rate is higher than the impact of the Federal Reserve Bank (...

2016

In this study, the monetary transmission mechanism and the effectiveness of the credit channel have been analyzed. According to the analysis results, the most important instrument in the applications of the monetary policy in Turkey is variable interest rates. Interest rates are the most significant main effectives for all other variables and they influence the total deposit, the total credits and the size of the total security. While an increase in deposits raise the size of loanable fund by banks,an increase in credits influences the industrial production index positively. It has been concluded that an increase in industrial production depends on the volume of the banks’ credit, whilst has been is determined that credits mostly depend on loanable funds and deposits held by banks. When the first 2 periods are disregarded, it was determined that the bank lending channel has been operating in Turkey.

Monetary transmission mechanism, which is used by central banks to affect consumption, investment and saving decisions of both households and firms, has been subject of many theoretical and empirical studies. It seems that there is a consensus that monetary policy affects real economy in the short run. But on the other hand, the question "how it actually does" has been discussed by many economists for several years. The reason for this is that the countries which are at different stages of development also have financial systems at different levels. While in industrialized countries, the capital market system is more effective in the financial system; in developing countries, banking system is dominant in the financial system. From this viewpoint, this study tries to answer the question "which of the two channels of transmission mechanisms is effective in the two developing countries, Argentina and Turkey, "money channel or credit channel (which is not alternative but complementary for money channel)". VAR model is used to identify relative strengths of different monetary transmission channels in each country by five macroeconomic variables which are stated in the following order: overnight rate, bank deposits, bank loans, consumer price index and industrial production index. The data period of these variables ranges from 2003:01 to 2010:08. The paper proceeds as follows: Section I provides theoretical background of the money and credit channels of transmission mechanism. Section II summarizes recent empirical studies. Section III describes variables and discusses the empirical findings of the model. Section IV provides concluding remarks.

Middle East Development Journal, 2019

The use of monetary policy to stimulate economic activity around the globe and in Turkey has been receiving a flurry of attention. Calls for lower interest rates have become louder as the country's private driven growth has slowed down. However, monetary policy faces the challenges of maintaining external stability and reviving domestic conditions, which could necessitate conflicting interest rate policies. To determine which goals are most suitable for monetary policy, one must understand the effects of monetary policy and its transmission channels to the macro economy. Our empirical results suggest that monetary policy in Turkey has fairly limited power to affect output growth, even in the short-run. We find that external factorssuch as shocks to risk aversion and global growthhave a much stronger impact on economic activity in Turkey. These results seem to be in line with the strand of the literature, which highlights the importance of global financial cycles and argues that exchange rate flexibility alone is not enough to guarantee monetary autonomy in a world of large capital flows. Consequently, our empirical findings corroborate the notion that monetary policy should focus on its overriding objective of price stability, given Turkey's greater exposure to supply shocks and pro-cyclicality of international finance.

International Journal of Finance & Economics, 2020

This study develops a simple theoretical framework and conduct a comprehensive empirical analysis on (a) the role of monetary policy on external funding and loan growth, (b) the consequent growth in national spending and finally, (c) the effects of these on the external deficit of Turkey within the period of 2002 to 2016. We argue that this was a highly unusual period with abundant global liquidity, substantial decrease in domestic real interest rates, considerable growth in capital inflow and bank lending, but a remarkable deterioration in external balance. Our empirical approach sheds light on both short and long run dynamics among key domestic and global economic indicators, those related to monetary policy, capital inflows, domestic spending, exchange rates and external deficit. Overall, while clearly validating the import dependency of the Turkish economy, our findings provide mixed evidence about the role of monetary policy on external deficit. Among the monetary policy tools tested, only the reserve requirement policy, seems to have a direct effect, however, real interest rates seem to be influential only via the channel of consumer loans and consumption expenditures. Expansions in bank lending cause corresponding increases in components of national expenditure, which subsequently contribute to the deterioration in trade deficit. As for the policy implications of our findings, to reduce external deficit, in long run, lowering the import dependency of the economy and reducing the shortfall in national savings is vital, whereas, in short run, only distortionary policies, such as limiting loan growth or restricting imports, are only feasible options. K E Y W O R D S capital inflows, external deficit, loan growth, monetary transmission mechanism 1 | INTRODUCTION After the severe financial crisis experienced by the Turkish economy in 2001, the Central Bank of the Republic of Turkey (CBRT) switched to a "managed-float" currency regime, which led to a real appreciation of the Turkish Lira up until 2010. In the same period, Turkey also experienced a noticeable and almost completely steady (except for the period immediately after the 2008 global financial crisis) deterioration in its external deficit. 1 From this angle, the period after 2002 presents an interesting and probably a controversial picture, in terms of the

Kahramanmaraş Sütçü İmam Üniversitesi sosyal bilimler dergisi, 2013

Developed countries experienced serious difficulties after the global financial crisis and used an excessive monetary easing strategy. Due to the decoupling, developing countries recorded high growth rates through raising capital inflows. In this new era, there is an effort to replace the price stability and the inflation targeting regime with a new monetary policy sensitive to financial stability. Also the central bank headed an unorthodox monetary policy in Turkey. The new monetary policy includes new tools such as interest rate corridor and reserve options mechanism. This paper examines this unorthodox monetary policy aiming to sustain macroeconomic stability taking into account the financial stability.

Journal of Reviews on Global Economics, 2017

This study aims to analyse the determinants of inflation and the effectiveness of the monetary transmission in Turkey. The study is covering the period 2003:Q2-2015:Q3 which consists of just an inflation targeting time before 2008, and inflation and financial stability targeting time after 2008 global financial crises. The autoregressive distributed lag model (ARDL) bound test is used for the long-run relationship and a VAR analysis for the short-run dynamics. The cointegration results reveal that the credit growth, US/TL exchange rate, real effective exchange rate, interest rate, and imported inflation are the determinants of inflation in Turkey in the long run. Also, our empirical findings indicate that exchange rate is the most effective factor in inflation. According to the VAR model's impulse responses, the key drivers of inflation are the movements in the US/TL nominal effective exchange rate, real effective exchange rate, interest rate, GDP growth in the short-term, and credit growth is in the medium-term. ARDL cointegration and impulse responses also show that interest rate and credit growth are efficient instruments as a monetary policy for the inflation targeting and financial stability.

OECD Economics Department Working Papers, 2008

The challenges of monetary policy in Turkey Monetary policy has been one of the main pillars of the post-2001 stabilisation programme. Encouraged by its success, the central bank shifted from implicit to explicit inflation targeting in 2006 and set a medium-term inflation target of 4%, applicable from end 2007. However this objective faced with two important challenges. On the one hand, inflation inertia settled in and non-tradable inflation stagnated at more than 10%, further fuelled by persistent surge in global commodity and energy prices. On the other hand, real interest rates remained high, continuing to fuel strong capital inflows and currency appreciation, and undermining the competitiveness of labour-intensive segments of the economy. Turkey is, therefore, faced with the classic dilemma of successful catching-up economies: Inflation inertia requires a tight policy while competitiveness losses appear to go beyond the absorption and adaptation capacity of large segments of the economy. This chapter argues that resolving this issue requires monetary policy to be supported by broader policies, including proactive competition policy to reduce costs and prices in services, enforcement of a credible multi-yearly spending framework to consolidate confidence in fiscal stability, and employers' and employees' commitment to anchor prices and wages more on the inflation target. Success with such policies would help shift the burden away from the central bank's interest rate as the only available instrument to increase the credibility of the inflation target.

2015

This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand the constraints on the effectiveness of the Central Bank of the Republic of Turkey (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank's ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables that the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank's influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than to domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner.