Abstract

This paper analyzes the effects of the real policy interest rate on the banking sector lending rate, the deposit rate, real stock prices, and the real exchange rate using the Engle Granger cointegration method (EG), the vector error-correction model (VECM), and the nonlinear vector error-correction model (NVECM) with monthly Turkish data over the period January 2002–April 2018. (1) EG results indicate bivariate cointegration relationships between the real interest rate, lending rates, and the deposit rate. The real interest rate increases all lending rates, mainly the housing rate. However, the long-run coefficient for the real exchange rate is not statistically significant. The pass-through is higher for the deposit rate than for lending rates. Moreoever, real stock prices shrink substantially where the finance sector has been affected the most. (2) VECM results indicate a cointegration relationship between all the variables except for the real exchange rate, which has a statistically non-significant pass-through coefficient. The real interest rate has a noteworthy long-run positive effect on the housing loans lending rate compared to others. The affirmative effect on real stock prices is the highest for the technology sector. The short-run effect of the real interest rate on lending rates, real stock prices and the real exchange rate are statistically non-significant except for the overall stock price index, and the vehicle loans lending rate which has a higher coefficient than the deposit rate. (3) NVECM results allow testing of eleven hypotheses and highlight the symmetric relationship and the valid pass-through effect, and reject the strong exogeneity assumption for all variables.

Highlights

  • Empirical economics indicates that the real policy interest rate has a substantial influence on macro-financial variables in emerging markets

  • This paper analyzes the effects of the real policy interest rate on the banking lending rate, deposit rate, real stock prices, and the real exchange rate for Turkey in the period 2001:01–2018:04 by the Engle and Granger (1987) two step cointegration (EG) method, the vector error-correction (VECM) model, and the nonlinear vector error-correction (NVECM) model

  • Leroy and Lucotte (2016) consider the policy rate as an endogenous variable, benefit from the panel interacted vector autoregressive (PIVAR) method and find that the competition in banking sector spurs the pass-through to the lending rate and the effect is non-homogenous for European Union (EU) countries

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Summary

Introduction

Empirical economics indicates that the real policy interest rate has a substantial influence on macro-financial variables in emerging markets. The nonlinear model has several advantages over the others It allows the analysis of the symmetry property of adjustment coefficients for financial and real variables.. It allows the analysis of the symmetry property of adjustment coefficients for financial and real variables.1 Another advantage of this model is about an exogeneity assumption. By employing the NVECM model, symmetry, completeness and exogeneity hypotheses can be tested for the Turkish economy. The last section summarizes, emphasizes limitations and presents implications of the paper and suggestions for future research

Literature Review
Major Results
Data and Methodology
Result
Results
Discussions
Conclusions
Suggestions for Further Research
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