An Analysis of Exchange Market Pressure and Monetary Policy: Evidence from Turkey

Yıl 2000, Cilt: 2 Sayı: 1, 61 - 74, 01.06.2000

Alpaslan Akçoraoğlu

Öz

The present paper examines the interrelations between exchange market pressure (EMP) and monetary policy for the specific case of Turkey within a context of VAR. Employing the monthly data for Turkey during 1990s, this paper examines whether the data for Turkey supports the predictions of Girton-Roper monetary model of exchange market pressure (EMP). The evidence presented in this paper indicates that one measure of monetary policy, domestic credit growth by the central bank, has a significant and positive impact on EMP as predicted. However, the author finds no evidence of Granger causality from interest differential to EMP. This surprising result may be explained by the fact that interest rates contain both policy and market-determined elements. In fact, the signs of the impulse- response functions conform to the predictions of the Girton-Roper's monetary model. On the other hand, our evidence suggests that policy authorities respond to higher EMP by increasing domestic interest rates. However, the direction of the responses of domestic credit to higher EMP is mixed. Finally, our evidence reveals that Fisher effect dominates liquidity effcct in Turkey during 1990s.