May Monetary Transmission Lags Have a Role in Missing Inflation Targets in Turkey? Cointegration Tests with Structural Breaks and Structural VAR Analysis

Umit Bulut

International Journal of Economics and Finance, 2016, vol. 8, issue 4, 93-103

Abstract: This paper aims at estimating the monetary transmission lag in Turkey by utilizing quarterly data from 2006:1 to 2015:4. To this end, the paper, first, follows unit root tests and cointegration tests. Then, the paper employs structural vector autoregressive (SVAR) analysis. SVAR analysis explores that a positive one-unit standard deviation shock to real interest rate causes inflation to decrease in the eighth period and the decrease in inflation prolongs up to the tenth period. Therefore, SVAR analysis yields that the monetary transmission lag is two and a half years in Turkey. Based on its own findings and those of a previously produced paper which yields that the CBRT considers 12-month ahead expected inflation rate while it is steering interest rates, the paper thus argues that monetary transmission lags may have a role in missing inflation targets in Turkey along with some other factors. In conclusion, the paper argues that the CBRT should pay attention to 24-month ahead or 30-month ahead expected inflation rates instead of 12-month ahead expected inflation rate to achieve or run-up to inflation targets.

Keywords: the Central Bank of the Republic of Turkey; monetary transmission lag; real interest rate; inflation; structural vector autoregressive analysis (search for similar items in EconPapers)
Date: 2016
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