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Analysis of the Effect of Interest Rate Corridor Strategy on Common Stock and Exchange Rate

Author

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  • Tetik, Metin

    (Usak University)

  • Ceylan, Reşat

    (Pamukkale University)

Abstract

This study is found to find out how interest rate corridor strategy, which is new policy tool implemented by Central Bank of Turkey in 2011, affects financial investment tools, common stocks and Exchange rates. The study separates the time into two periods, the period before interest rate corridor strategy and the period after implementation of interest rate corridor strategy. The effects of the changes in policy interest rate on the common stocks and exchange rate are examined in the framework of structural vector auto regression (SVAR) model. The most important finding is that the effect of a change in policy interest rate on common stocks and exchange rate becomes more permanent after interest rate corridor strategy. Another finding is that short term capital flows with speculative move is deterred from after this strategy. Findings are in coincidence with the results of increase in interest rate volatility as Başçı and Kara (2011) suggests.

Suggested Citation

  • Tetik, Metin & Ceylan, Reşat, 2015. "Analysis of the Effect of Interest Rate Corridor Strategy on Common Stock and Exchange Rate," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 6(4), pages 55-69, October.
    • Handle: RePEc:ris:buecrj:0203
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    More about this item

    Keywords

    Monetary policy; interest rate corridor; common stock; exchange rate; structural vector auto regression model;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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