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On the relative importance of monetary transmission channels in Turkey

Author

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  • Turhan, Ibrahim M.
  • Gumus, Nihat

Abstract

The main objective of this study is to provide additional evidence on the operation and relative importance of monetary transmission channels in Turkey. The results of the VAR analysis conducted using monthly data between January 2004 and November 2013 suggest that the traditional channels of interest rates, exchange rates, and credit do work in Turkish economy. However, the most striking finding of the study is the relative importance of exchange rate channel in the transmission of monetary policy decision into real economy. Variance decomposition analysis shows that the explained variance by real effective exchange rates is higher for all variables as compared to the variance explained by interest rates. However, interest rates seem to be still a useful tool to manage monetary policy given its role in controlling the changes in exchange rates. The granger causality analysis points into the fact that while interest rates have a role in leading the volatility of exchange rates, exchange rates have an impact on foreign debt holdings of banks and credit growth. On the other hand, foreign debt positions of banks and other sector firms together with credit growth granger causes industrial production. The study has some remarkable ramifications in terms of monetary policy design.

Suggested Citation

  • Turhan, Ibrahim M. & Gumus, Nihat, 2014. "On the relative importance of monetary transmission channels in Turkey," MPRA Paper 69827, University Library of Munich, Germany, revised 12 May 2014.
    • Handle: RePEc:pra:mprapa:69827
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary transmission mechanism; monetary policy; interest rate channel; exchange rate channel;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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