Effectiveness of Monetary Policy: Evidence from Turkey

Effectiveness of monetary policy depends on the degree to which policy interest rate affects all other financial prices, including the entire term structure of interest rates, credit rates, exchange rates and asset prices. An effective monetary policy framework can be seen as a pre-condition for well-functioning financial markets. However, effectiveness of the monetary policy is not straightforward to measure and requires empirical work to understand the effects of financial infrastructure, competitiveness of financial markets as well as current economic conditions. This paper examines the effectiveness of the monetary policy in Turkey by focusing on the interest rate pass-through behavior by means of an Interacted Panel Vector Autoregressive (IPVAR) approach. The results suggest that policy rate innovations transmit fully in less than eight months. Regulatory quality of the country, competition, liquidity, and profitability of banking sector, dollarization and exchange rate flexibility, inflation, and term structure have a positive effect on interest rate pass-through. Short-term credit ratio, GDP growth, monetary growth, and capital inflows have a negative effect