Multiple policy interest rates and economic performance in a multiple monetary-policy-tool environment

Abstract

This paper assesses the individual effects on economic performance of different monetary policy interest rates for a central bank. To measure these effects, we employ an extension of existing Factor-Augmented Vector Autoregressive (FAVAR) models, such that the number of monetary policy variables can be captured with a few unobservable factors, as well as economic state variables with other unobservable factors. The empirical evidence from Turkey suggests that the four interest rates we consider as policy tools for the central bank affect economic state variables in different magnitudes. Thus, selecting different policy tools provides an environment that allows determining the effects of each tool for differentiated economic outcomes.