THE MONETARY TRANSMISSION MECHANISM: EVIDENCE FROM TURKEY

Abstract

Purpose- The CBRT announced in April 2010 that included financial stability in its target function, and in November 2010 started implementing modified monetary policy strategy with new monetary policy tools. In this study, the effectiveness of modified monetary policy was questioned. Thus, primarily the impacts of intermediate targets on price stability, then the impacts of policy instruments on intermediate targets have been investigated.

Methodology- The Johansen cointegration test and VECM are used to show long-run relationships and causality between variables. Then, Granger causality test is used to examine short-run causality between the variables.

Findings- In the long run, while credit supply and USD exchange rate affect price level, the average funding rate doesn`t affect the price level. Credit supply, USD exchange rate and average funding rate affect  TUFE in the short run. In addition, in the long run, while the required reserve ratio and interest corridor affect credit supply; average funding rate and policy interest rate doesn`t affect credit supply. Moreover, in the long run, policy instruments do not have an impact on the USD exchange rate. Reserve requirements cause changes in credit supply, and average funding rate causes changes in USD exchange rate in the short run.

Conclusion- The exchange rate channel and the credit channel is valid in Turkey. In addition, while required reserves and interest rate corridor have a predictable impact on the credit supply, no policy instrument has a predictable effect on the exchange rate. 

 

Keywords

• Monetary transmission mechanisms,Johansen cointegration test,monetary policy instrument

References

1. Ahmed, S., and Islam, M. E. (2004). The monetary transmission mechanism in Bangladesh: Bank lending and exchange rate channels. The Bangladesh Development Studies, 31-87.
2. Akbaş, Y. E., Zeren, F., and Özekicioğlu, H. (2013). Türkiye’de Parasal Aktarım Mekanizması: Yapısal VAR Analizi. Cumhuriyet Üniversitesi İktisadi ve İdari Bilimler Dergisi, 14(2), 187-198.
3. Alper, K., and Tiryaki, T. (2011). Zorunlu karşılıkların para politikasındaki yeri. CBT Economic Note, (11/08).
4. Ando, A., and Modigliani, F. (1963). The" life cycle" hypothesis of saving: Aggregate implications and tests. The American economic review, 53(1), 55-84.
5. Basci, E., and Kara, H. (2011). Finansal istikrar ve para politikası. İktisat İşletme ve Finans, 26(302), 9-25.
6. Bernanke, B. S., and Blinder, A. S. (1988). Credit, money, and aggregate demand. The American Economic Review, Vol. 78, No. 2, 435-439.
7. Bernanke, B. S. (1993). Credit in the Macroeconomy. Quarterly Review-Federal Reserve Bank of New York, 18, 50-50.
8. Bernanke, B. S., and Gertler, M. (1995). Inside the black box: the credit channel of monetary policy transmission (No. w5146). National bureau of economic research.

9. Binici, M., Kara, H., and Özlü, P. (2016). Unconventional Interest Rate Corridor and the Monetary Transmission: Evidence from Turkey. TCMB Çalışma Tebliği, (16/08).
10. Buyukakın, F., Cengiz, V., and Turk, A. (2013). PARASAL AKTARIM MEKANİZMASI: TÜRKİYE’DE DÖVİZ KURU KANALININ VAR ANALİZİ. Dokuz Eylül Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 24(1).
11. Camarero, M., Ordóñez, J., and Tamarit, C. R. (2002). Monetary transmission in Spain: a structural cointegrated VAR approach. Applied Economics, 34(17), 2201-2212.
12. Cambazoglu, B., and Gunes, S. (2011). Monetary Transmission Mechanism in Turkey and Argentina. International Journal of Economics and Finance Studies, 3(2), 23-33.
13. Cambazoglu, B., and Karaalp, S. H. (2012). The effect of monetary policy shock on employment and output: the case of Turkey. Economics, Management and Financial Markets, 7(4), 311.
14. Cengiz, V. (2009). PARASAL AKTARIM MEKANİZMASI İŞLEYİŞİ VE AMPİRİK BULGULAR. Erciyes Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, (33), 225-247.
15. Fischer, S., and Modigliani, F. (1978). Towards an understanding of the real effects and costs of inflation. Review of World Economics, 114(4), 810-833.
16. Fleming, J. M. (1962). Domestic financial policies under fixed and under floating exchange rates. Staff Papers, 9(3), 369-380.
17. Friedman, B. M. (1990). Targets and instruments of monetary policy. Handbook of monetary economics, 2, 1185-1230.
18. Friedman, M., and Schwartz, A. J. (1975). Money and business cycles. In The state of monetary economics (pp. 32-78). NBER.
19. Hicks, J. R. (1937). Mr. Keynes and the" classics"; a suggested interpretation. Econometrica: Journal of the Econometric Society, 147-159.
20. İncekara, A., Demez, S., and Ustaoğlu, M. (2012). Validity of Fisher effect for Turkish economy: cointegration analysis. Procedia-Social and Behavioral Sciences, 58, 396-405.
21. Incekara A., Amanov A. (2017). Optimal policy instrument selection in monetary policy: Endogeneity of money supply. Journal of business, economics and finance, 6(2), 61-69.
22. Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of economic dynamics and control, 12(2-3), 231-254.
23. Johansen, S. (1995). Identifying restrictions of linear equations with applications to simultaneous equations and cointegration. Journal of econometrics, 69(1), 111-132.
24. Kasapoğlu, Ö. (2007). Parasal Aktarım Mekanizmaları: Türkiye İçin Uygulama. Uzmanlık Yeterlilik Tezi. Ankara: Türkiye Cumhuriyet Merkez Bankası.
25. Mankiw, N. G. (2001). The inexorable and mysterious tradeoff between inflation and unemployment. The Economic Journal, 111(471), 4561.
26. Mehrotra, A. N. (2007). Exchange and interest rate channels during a deflationary era—Evidence from Japan, Hong Kong and China. Journal of Comparative Economics, 35(1), 188-210.
27. Modigliani, F., and Brumberg, R. (1954). Utility analysis and the consumption function: An interpretation of cross-section data. Franco Modigliani, 1.
28. Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique, 29(4), 475-485.
29. Nagayasu, J. (2007). Empirical analysis of the exchange rate channel in Japan. Journal of International Money and Finance, 26(6), 887-904.
30. Örnek, İ. (2009). Türkiye’de parasal aktarım mekanizması kanallarının işleyişi. Maliye Dergisi, 156, 104-125.
31. Özcan, K. M., Özlale, Ü., and Sarıkaya, Ç. (2006). Sources of growth and the output gap for the Turkish economy. Contributions to Economic Analysis, 278, 237-266.
32. Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861– 19571. Economica, 25(100), 283-299.
33. Poole, William. "Optimal choice of monetary policy instruments in a simple stochastic macro model." The Quarterly Journal of Economics 84.2 (1970): 197-216.
34. Saraçoğlu, B., and KÖSE, N. (1999). Vektör Otoregresyon Yaklaşımı ile Enflasyonla Mücadelede Politika Seçimi: Türkiye Örneği 80-96. İktisat İşletme ve Finans, 14(159), 12-27.
35. Sevüktekin, M., and Çınar, M. (2014). Ekonometrik Zaman Serileri Analizi, Dora Yayıncılık, 4. Baskı, Bursa.
36. Sheshinski, E., and Weiss, Y. (1977). Inflation and costs of price adjustment. The Review of Economic Studies, 44(2), 287-303.
37. Smets, F., and Wouters, R. (1999). The exchange rate and the monetary transmission mechanism in Germany. De Economist, 147(4), 489521.
38. Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of money, credit and banking, 1(1), 15-29.
39. Woodford, M. (2001). Monetary policy in the information economy (No. w8674). National Bureau of Economic Research.
40. Zhang, Y., and Sun, G. (2006). China’s consumer credit sector expansion and monetary transmission mechanism: What should China’s central bank do?. Journal of Chinese Political Science, 11(1), 79-93.