Functioning and Effectiveness of Monetary Transmission Mechanisms: Turkey Applications

Abstract

Functioning and Effectiveness of Monetary Transmission Mechanisms: Turkey Applications Assist. Prof. Aylin Erdogdu, Ph.D. Abstract Central banks can achieve their objectives through a host of measures. Monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism can be characterised by parameters such as long maturity, economic variables and uncertain time lags. Therefore, it is difficult to predict the precise effect of monetary policy actions on economy and price level. Monetary policy is currently in the center of discussions about how to promote sustainable growth and low inflation. This study provides an overview of the transmission mechanisms of monetary policy, starting with the traditional interest rate channels, and it explains the operating principles of other asset pricing which are so-called credit channels. Monetary policies of central banks will be analyzed throughout this paper. Theoretical principles of monetary transmission channels are examined by investigating the effectiveness of these channels in terms of the relationships between monetary policies and economic realities. This is done in order to identify which monetary channels are actively working by utilizing vector auto regression model. This paper provides an overview of transmission mechanisms of monetary policy. The results of the vector auto regression model revealed that the traditional interest rate channels of the monetary transmission mechanism work actively in Turkey. It also indicates that the exchange rate channel does not play a decisive role at this level of production even though a significant effect on the general prices can be expressed through exchange rate channels. Observations suggested that stock quotes and credit channels are not working effectively. Full Text: PDF DOI: 10.15640/jfbm.v5n1a3