Abstract
This paper aimed to analyze the impacts of interest rate corridor policy on monetary efficiency in Turkey, applying the Error Correction Model and VEC Granger causality. The data set consisted of 108 observations for each time series from May 2010 to December 2019. The Granger causality test results indicated a significant impact of the borrowing rate on the inflation rate. Response function revealed that a change in the borrowing interest rate affected the opposite way in the inflation rate with a 3-month lag. An increase in the lending rate caused an increase in the BIST 100 index value. It is concluded that the interest rate corridor implementation successfully increased the flexibility and effectiveness of the monetary policy in Turkey.
Highlights
This paper aimed to analyze the impacts of interest rate corridor policy on monetary efficiency in Turkey, applying the Error Correction Model and VEC Granger causality
This study revealed that when the central bank responded by increasing the borrowing interest rate during periods of high inflation, inflation reacted and decreased after three months
If uncertainty prevailed in the general situation of the economy, the interest rate corridor instrument might create a partial uncertainty in the market regarding interest rates
Summary
This paper aimed to analyze the impacts of interest rate corridor policy on monetary efficiency in Turkey, applying the Error Correction Model and VEC Granger causality. It is concluded that the interest rate corridor implementation successfully increased the flexibility and effectiveness of the monetary policy in Turkey. Cambazoğlu and Karaalp (2012) analyzed the effect of the exchange rate channel on prices and total output by establishing a VAR model. Lee (2016) analyzed the interest rate corridor policy by comparing UK and Eurozone data. Teber (2018) examined the effect of the interest rate corridor policy by comparing UK and Eurozone data. Arıkan et al (2018) analyzed the effect of the interest rate corridor on the Turkish economy using the VAR analysis model. Öztürk et al (2021) examined the impacts of Covid 19 on Turkish monetary policy
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