On the relative importance of monetary transmission channels in Turkey

Ibrahim Turhan and Nihat Gumus

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Monetary transmission mechanism; monetary policy; interest rate channel; exchange rate channel (search for similar items in EconPapers)
JEL-codes: E52 E58 G18 (search for similar items in EconPapers)
Date: 2014-05-12, Revised 2014-05-12
New Economics Papers: this item is included in nep-ara, nep-cwa, nep-mac and nep-mon
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