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Burak Eroglu and Secil Yildirim-Karaman
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Burak Eroglu: Istanbul Bilgi University
Secil Yildirim-Karaman: Altinbas University

Working Papers from The Center for Financial Studies (CEFIS), Istanbul Bilgi University

Abstract: This paper investigates the impact of the policy decisions by the Central Bank of the Republic of Turkey (CBRT) and Federal Reserve (FED) on the financial markets in Turkey between 2010 and 2016, the period in which CBRT adopted new policy objectives. We investigate the impact of monetary policy shocks on the term structure of interest rates, exchange rates and credit default swap (CDS) rates using VAR framework. For identification, we rely on the assumption that monetary policy shocks are heteroscedastic. Our results show that expansionary monetary policy shocks by the CBRT made the yield curve steeper, caused TL to depreciate and CDS rates to decrease. As for FED decisions, expansionary decisions decreased the bond yields and CDS rates and caused TL to appreciate. The paper contributes to the literature by investigating the response of the term structure of interest rates and other asset prices for the period in which CBRT prioritized financial stability and did not make guidance for the future stance of monetary policy and by testing whether bond yields with various maturities responded to monetary policy shocks differently. Our results imply that not following a long term inflation target and lack of communication weakened the control of the CBRT over the long term interest rates.

Keywords: Monetary policy; Term structure of interest rates; Asset prices; Heteroscedasticity based identification (search for similar items in EconPapers)
JEL-codes: E40 E43 E44 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-cba, nep-mac and nep-mon
Date: 2017-11
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