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ABSTRACT
The use of monetary policy to stimulate economic activity around the globe and in Turkey has been receiving a flurry of attention. Calls for lower interest rates have become louder as the country’s private driven growth has slowed down. However, monetary policy faces the challenges of maintaining external stability and reviving domestic conditions, which could necessitate conflicting interest rate policies. To determine which goals are most suitable for monetary policy, one must understand the effects of monetary policy and its transmission channels to the macro economy. Our empirical results suggest that monetary policy in Turkey has fairly limited power to affect output growth, even in the short-run. We find that external factors – such as shocks to risk aversion and global growth – have a much stronger impact on economic activity in Turkey. These results seem to be in line with the strand of the literature, which highlights the importance of global financial cycles and argues that exchange rate flexibility alone is not enough to guarantee monetary autonomy in a world of large capital flows. Consequently, our empirical findings corroborate the notion that monetary policy should focus on its overriding objective of price stability, given Turkey’s greater exposure to supply shocks and pro-cyclicality of international finance.
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Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
* We have greatly benefited from comments by two anonymous referees. The views expressed in this paper are those of the authors and should not be attributed to the institutions with which they are affiliated.
1 See, for instance, Williamson (Citation2014) and references therein.
2 Financial Times (Citation2016).
3 See Acemoglu and Ucer (Citation2015) for a detailed analysis of Turkey’s growth performance and the challenges ahead.
4 See, for instance, Rey (Citation2013, Citation2016), Forbes and Warnock (Citation2012) and Cerutti et al. (Citation2017)
5 See, for instance, Rey (Citation2013, Citation2016) as well as Forbes and Warnock (Citation2012).
6 Bloomberg (May 2, Citation2017).
7 See also Mishra and Montiel (Citation2012) and McGettingan et al. (Citation2013) for a review of monetary policy in emerging markets.
8 A similar point was also made by Forbes and Warnock (Citation2012).
9 See, for example, Bernanke and Blinder (Citation1992) as well as Christiano, Eichenbaum and Evans (Citation1996a, Citation1996b). Refer to Basci et al. (Citation2008) in the case of Turkey.
10 See, for instance, Uhlig (Citation2005) and also refer to Canova (Citation1995) for a comprehensive review.
11 See Christiano, Eichenbaum, and Evans (Citation1996a, Citation1996b) for a detailed technical exposition of this strategy.
12 Since the CBT’s main policy rate has changed over time: overnight borrowing rate (January 2002–May 2010), the one-week repo rate (June 2010–November 2011) and the average funding rate (December 2011–March 2017) measure the variables that reflect monetary policy stance.
13 The revised data for Turkey’s national income accounts were released in January 2017. The revision was carried out under the guidance of SNA-2008 and ESA-2010 standards. Our sectoral focus was dictated by data availability following the revision.
14 We consider lags up to 4 quarters. Please refer to Ivanov and Kilian (Citation2005) who demonstrated that the Schwarz Information Criterion (SIC) is more accurate for sample sizes smaller than 120.
15 The analysis employs Johansen Co-integration test. The result provides evidence of a long-run relationship among the variables of interest in all cases at the 5% level of significance.
16 To establish robustness, the analysis considers the sensitivity of the findings to: (i) changing the order of the policy rate and also employing generalized impulse responses in the orthogonalized responses; (ii) considering a different sample period (2006Q1–2018Q3); and (iii) dropping the dummy variables included to account for the global financial crisis and the failed coup attempt in July 2016. The results remain qualitatively similar regarding the limited role of the monetary policy rate in influencing aggregate and sectoral output.
17 ‘Own’ represents shocks to the variable in question that cannot be explained by other variables, i.e., idiosyncratic. This finding is not surprising given the high frequency of Turkey-specific shocks during the period under consideration. While we attempt to deal with major shocks such as the failed coup attempt, it is not possible to fully isolate other Turkey-specific developments such as the introduction of the Credit Guarantee Fund, tax adjustments and various stimulus packages as well as regulatory changes.
18 International Monetary Fund (IMF), Turkey: Staff Report for the 2016 Article IV Consultation (Citation2016).
19 Economists who subscribe to this view argue that flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows. See, for instance, H. Rey (Citation2016), ‘International Channels of Transmission of Monetary Policy and the Mundellian Trilemma’.
20 However, as can be seen from and , there is some evidence suggesting that monetary policy shocks can have some impact on certain components (GFCF, private consumption and construction) in the short-run.
21 As was pointed out by Bernanke (Citation2015), we recognize that this finding alone does not tell us very much about the extent to which the financial correlations across countries reflect relatively benign factors and how much they reflect more malign influences. Put differently, it is possible that Turkey’s macroeconomic vulnerabilities—for instance, large external financing requirements—magnify financial instability spillovers, which seems to have been the case during the so-called taper tantrum of 2013.
22 Forbes and Warnock (Citation2012) and Rey (Citation2013) for more on this.