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Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis

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  • K. Azim Ozdemir

Abstract

This paper investigates the importance of interest rate shocks in explaining macroeconomic dynamics during the relatively low-inflation period in Turkey after mid-2000s. For this purpose, we compute impulse response functions using not only VAR models but also multi-step ahead forecast regressions, which are referred as Local Projections. Estimations are carried out on two different monthly data sets, a set of conventional series and a newly constructed set of series for measuring real GDP, the price level and the exchange market pressure in Turkey. Impulse responses obtained from newly constructed series exhibit more plausible dynamics than the conventional series after an interest rate shock. Moreover, results from Local Projections show remarkably similar dynamic responses to those obtained from the VAR models. This finding can be interpreted as an evidence that the identified VAR models successfully capture the true relationships among the variables.

Suggested Citation

  • K. Azim Ozdemir, 2015. "Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis," Working Papers 1504, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:1504
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Identification; VAR; Local Projections; Interpolation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access

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