CENTRAL BANK FINANCIAL STABILITY MEASURES: THE EFFECT OF REAL EXCHANGE RATE AND BANK CREDIT ON CURRENT ACCOUNT DEFICIT

Yıl 2012, Cilt: 12 Sayı: 24, 241 - 260, 01.12.2012

Fatih Mangır Savaş Erdoğan

Öz

By shifting from implicit inflation targeting regime, The Central Bank has
implemented “explicit inflation targeting” regime using a short-term interest rate as the
key instrument of monetary policy since 2004. Inflation rates in Turkey have dropped
considerably since the 2002, coming from an average of %29, 7 percent in 2002 down to
6.4 percent in the 2010.
Low and stable rate of inflation and the current global conjuncture urges the Central
Bank to implement interest rate cut policy.
Despite stable indicators, the economy, however, continues to be burdened by a high
current account deficit and remains dependent on often volatile, short-term investment to
finance its trade deficit. And this deficit has caused strong critics of Central Bank interest
rate policy. Therefore, Central bank has taken some measurements in order to stabilize the
possible effects of current account deficit.
Central Bank viewed the fundamental reasons of current account deficit as domestic
credit expansion in banking sector, because The Turkish banking sector has achieved
rapid growth in credit and sector profits due to the low-inflation environment and the
impact of the decline in interest rates. The banking sector's asset structure, leverage ratios
and its role of macroeconomic stability have become a quite important factor for price
stability. So Central bank warns banks and other financial institutions to extend the
maturity of their deposits borrow on long-term basis and pay attention to their foreign
exchange positions.
Decision of the Central Bank’s interest rate policy has two contradictory effects on the
current account deficit. The first effect is the appreciation of real exchange rate that the
current account deficit is expected to further narrow. The second effect is the increase of
total credit in banking sector which the opposite direction is expected to given way to a
widening of the current account deficit.
So, the objective of price stability and financial stability took priority for a Central
bank of Turkey. Because, the accelerated growth of capital inflow to Turkey and rapid
credit expansion contributes to the widening of current account despite cutting interest
rate policy. For this reason, Central bank decided to keep short-term interest rates at the
same level and use alternative policy instruments such as liquidity management tools and
required reserves.
The effectiveness of measures over banking sector taken by Central Bank to achieve
the goal of financial stability in recent days has been one of the most popular discussion
topics.
The aim of this study is to contribute this debate by evaluating monetary policy of
Central Bank of Turkey focusing the effects of these measures over the volume of bank
credit and analyzing the relation credit growth, real exchange rate and current account
deficit.
In this study, the effect of real effective exchange rates based on consumer prices and
total credits on balance of current account has been examined within the framework of
VAR model analysis. First of all, it is controlled whether the data used in the study
contained unit root or not. In the next stage of the study, VAR models have been
predicted and causality relation among variables has been defined and then endogenous and exogenous variable situations have been defined. With the help of this model cause
and effect analysis and variance decomposition analysis have been made.
Within this scope, real effective exchange rates based on consumer prices and total
credits and balance of current account in 2003:1-2011:4 periods in Turkish economy have
been tested with using VAR models.
First, stationary of the variables has been investigated by using Augmented DickeyFuller
unit root tests. The results point to the presence of unit roots in series. However,
when the first differences of the variables are considered, their first difference is found to
be stationary.
When causality relation between variables is controlled, it has been found out that
only real exchange rates occurred to be the cause of the total credits.
Based on the variance decomposition results we can indicate that variance of balance
of current account explained mostly by the total credits. At 10 period avarage, the
proportion of balance of current account explained by total credit is approximately 11%,
We also observe that the variance of the balance of current account explained by real
exchange rate with approximately %2.5
The results suggest that the relationship between bank credit and the current account
deficit was even stronger than the relationship between real exchange rate and current
account deficit in Turkey. At the same time, this result also confirms our correlation
analysis conducted for three variables.
Monetary policy instruments implemented by the Turkish Central Bank and the
effects of these tools, over the balance of current account are one of the recently most
debated issues.
Rising debt ratios in banking sector due to the price stability and cutting interest rate
policy and the risk of these ratios on asset prices are tried to restrain by the measures of
Central Bank. Also, reduction of inflation to single digit figures in Turkey's economy and
high profitability and growth accelerated competition in the banking sector and has led to
credit expansion. Prior to 2008, under the low interest rate and stable inflation
environment, lack of supervision in the financial sector was the beginning of the path to
the global crisis. To minimize the effects of the global crisis, the Turkish Central Bank
has taken the measures as in many developing countries. Therefore it tries to control the
current account deficit by using the interest rate tool.
However, Turkish Central Bank faces interest-rate dilemma If it cuts interest rates, it
will be even cheaper to borrow and accelerate total credit which is risk for current account
deficit. But if it raises interest rates, it attracts investment for foreign capital flows which
also the risk for current account deficit. The Turkish central bank is trying to curb real
exchange overvaluation, control the current account deficit and cool credit expansion and
also sustain the inflation target policy. It will be difficult to achieve all these at the same
time.
The central bank's solution is to cut interest rates to control foreign investors, but at
the same time it has imposed much tighter limits on banks' lending. The results of our
study support this unconventional policy. Because the effect of cutting interest rate policy
on the current account deficit through real exchange rate works much weaker than total
credit channel.

Anahtar Kelimeler

Price Stability, Financial Stability, Current Account Deficit, Banking Credit, Real Exchange Rate

MERKEZ BANKASI FİNANSAL İSTİKRAR TEDBİRLERİ: REEL KUR VE KREDİLERİN CARİ AÇIĞA ETKİSİ

Öz

Yaşanılan son küresel krizinin ardından birçok ülke ekonomisi para politikası önceliklerini değiştirmiş, potansiyel bir ekonomik istikrarsızlığa karşın ekonomik büyüme, finansal istikrar ve ödemeler dengesi gibi göstergelere yönelik önlemler almışlardır. Aynı şekilde TC Merkez Bankası da politika faiz oranlarını FED’in genişletici para politikası ile piyasaya likitide salmasına tepki olarak düşürme eğilimine girmiştir. Ancak, Merkez Bankası kısa vadeli faizlere ilişkin kararlarını alırken, kredi kanalıyla oluşacak talep artışının yeniden fiyatlara yansıması gibi olası sonuçlarını hesaba katmak zorunda kalmaktadır. Bir diğer ifadeyle, merkez bankası, fiyat istikrarını sürdürürken finansal istikrarı da gözetmeye çalışmaktadır. Bu çalışmada, Merkez Bankasının fiyat istikrarı politikası yapısal değişimi itibariyle incelenmiş, bu bağlamda faiz oranlarındaki değişmelerin toplam kredi ve reel döviz kuru kanalı ile cari işlemler dengesi üzerine etkileri VAR modelleri yardımı ile ele alınmıştır. Analiz sonuçları Merkez Bankasının toplam kredi artışını kısıtlamak amacıyla faiz dışı araçlarla müdahalesini desteklemektedir.

Anahtar Kelimeler

Fiyat istikrarı, Finansal İstikrar, Cari Açık, Kredi, Reel Döviz Kuru