The monetary transmission mechanisms: An empirical application to the Turkish economy
This study aims to contribute monetary economics by studying monetary transmission channels in Turkey, an economy experiencing rapid structural change, rendering structural models very fragile. A case is made for using VAR techniques to measure monetary policy and reaction to it of other economic variables. One of the findings of my empirical work is the existence of "price puzzle", i.e., inflation rises in response to an increase in interest rates. A possible explanation for the persistent "price puzzle" is what we termed as "cost effect". Another possible explanation is so called "omitted variable" argument. A second finding of my empirical work is that monetary aggregates perform better than interest rate measures in the framework of VAR. Among monetary aggregates, narrow measures of monetary policy perform better than the larger measures. A third finding of my empirical work is that in the second sub-period covered, the interest rates become more sensitive to inflation when compared with the sub-period. However, the increased sensitivity of interest rates does not lessen the reactionary character of monetary aggregates in response to inflation. The fourth finding of my empirical work is that inflation responds to the innovations in monetary aggregates with a lag. This lag in the relationship between monetary aggregates and inflation allows innovations in monetary aggregates to generate short run real effects. The fifth finding of my empirical work is the existence of a weak bank-lending channel. Another finding related to the weak banking lending channel finding is the difficulty in finding a specific role for the free reserves of the banking sector. The sixth finding of my empirical work is that exchange rate deprecation is contractionary. Furthermore, we have consistently found that an expansionary monetary policy leads to a currency appreciation, rather than depreciation. The final implication of my dissertation is that in Turkey the monetary policy, specifically in the post-1994 period, has become anti-inflationary, which has made the policy predictable.