Roles of the Government Bond Yield and the Exchange Rate in the Monetary Conditions of Türkiye

Year 2024, Issue: 72, 50 - 63, 14.11.2024

Savaş Kaptan

https://doi.org/10.26650/mcd2024-1555315

Abstract

The debate over measuring central bank monetary policy stance persists in the literature. Evolving economic dynamics and diverse economic structures render traditional metrics inadequate, prompting the development of comprehensive monetary conditions indexes. In this respect, this study aims to craft a novel monetary conditions index for Türkiye, discovering an important yet neglected tool. This index consists of the real effective exchange rate and a spread that is the difference between the Central Bank weighted cost of funding rate and the benchmark bond yield. The weights of the exchange rate and spread in the index were determined using a VAR model and variance decomposition analysis. According to these weights, we created the monetary conditions index and tested its impact on the prices throughtheGrangercausalityanalysis.Theresultsindicatethatourmonetary conditions index significantly affects the prices in Türkiye, which proves the role of the government bond yield in the monetary transmission. It is further found that the exchange rate has a direct impact on the inflation rate and responds significantly to changes in the spread, implying that the spread influences prices primarily through the exchange rate pass-through mechanism.

Keywords

Monetary conditions, fiscal policy, bond yield, exchange rate, inflation

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