Asymmetric effects of monetary policy shocks on economic performance: empirical evidence from Turkey

ABSTRACT

This study investigates the asymmetric effects of monetary policy shocks on the macroeconomic variables of exchange rate, output and inflation for an emerging economy ‒ Turkey ‒ by using monthly data between 1990 and 2014. We employ the innovative nonlinear vector autoregressive model of Kilian and Vigfusson (2011), which allows us to observe the effect of different stances (tight or loose) and different sizes (small or large) of monetary policy actions. Our empirical evidence reveals that tight monetary policy, which, in this case, is captured with a positive shock to interest rate, decreases exchange rate, output and prices, as economic theory suggests. Loose monetary policy, which is captured with a negative shock to interest rate, has the opposite effect on these variables. However, the effects of loose monetary policy are weaker than the effects of tight monetary policy because loose monetary policy shocks are less effective than tight monetary policy shocks. Moreover, as the magnitude of a shock increases, the difference between the effects of tight and loose monetary policy policies also increases.

KEYWORDS:

• Monetary policy
• asymmetry
• nonlinear VAR models

JEL CLASSIFICATION:

• E52
• E58
• C32

Acknowledgements

The authors would like to thank Rana Nelson for her helpful comments.

Notes

¹ See Morgan (1993) for a history of asymmetry.

² Caballero and Engel (1992), Ball and Mankiw (1994), Ravn and Sola (1996), Weise (1999), Garcia and Schaller (2002), Lo and Piger (2005), Tan and Habibullah (2007), Vašíček (2012), Sznajderska (2014) and Georgiadis (2015) present the asymmetric effects of monetary policy.

³ Studies that suggest that a tight monetary policy is more effective for the United States include DeLong and Summers (1988), Cover (1992), Morgan (1993), Rhee and Rich (1995), Garibaldi (1997), Karras and Stokes (1999) and Karras (2013); for Europe include Karras and Stokes (1999); for Taiwan include Shen (2000); and for Pakistan include Zakir and Malik (2013).