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Interest Rate Corridor: A New Macroprudential Tool?

Mahir Binici, Hasan Erol, Hakan Kara (), Pınar Özbay Özlü () and Deren Unalmis

CBT Research Notes in Economics from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: The procyclical behavior of credit supply amplifies the business cycles. One of the aims of the traditional macro-prudential policies is to smooth the business cycle fluctuations by mitigating the excessive volatility in the risk appetite of financial intermediaries. This study shows that asymmetric interest rate corridor, a new policy instrument designed by CBRT, can be used for such a purpose. In this respect, this study focuses on the interaction of the interest rate corridor with the credit-deposit spread which is an important indicator of banks’ appetite for lending and hence credit supply. Our findings suggest that through the use of an asymmetric corridor policy together with an active liquidity management strategy, monetary policy is able to affect credit and deposit rates via different channels. Therefore, the interest rate corridor can be used to adjust the credit spread, and hence has the potential to be used as a macro-prudential policy tool.

Date: 2013
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