The bank lending channel in Turkey: has it changed after the low-inflation regime?

Abstract

In this article we aim to analyse the role of credit channel in the monetary transmission mechanism under different inflationary environments in Turkey covering the period from January 1986 to October 2009. Our results suggest that traditional interest rate channel is only valid for the post-inflation targeting period. This variable is also a more effective monetary policy tool in terms of its impacts on economic activity in both the regimes. Credit shocks itself have significant power on economic activity and prices. However, the effect of monetary shocks on credit volume is very limited, especially in the low-inflation regime.

Keywords:

• monetary policy
• bank lending channel
• regime change
• Turkey

JEL Classification:

• C32
• E52

Notes

¹ In order to examine unit root properties of the data we conduct Augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) unit root tests. These tests suggest all variables are integrated of order one. We also applied Zivot and Andrews (1992) unit root test, which allows for one endogenous structural break in the series. This test rejects the null hypothesis of a unit root with a break for all variables. The tests are not reported but are available upon request.

² See Tsay (1998) for detailed information on C(d) test.

³ The respective optimum lag length of endogenous and exogenous variables is determined as 3 and 4 on the basis of Akaike and Hannan–Quinn Information Criteria.

⁴ The model assumes that credit is the most endogenous variable. One can argue that output is more endogenous than inflation and that credit is less exogenous due to long-term contracts. To control this we employ alternative orderings such as and . However, we obtain qualitatively the same results.