ABSTRACT1 1 The views expressed in this paper are only those of the authors and should not be interpreted as reflecting those of the Central Bank of the Republic of Turkey. Email addresses: mailto:Hande.Kucuk@tcmb.gov.tr;Pinar.Ozbay@tcmb.gov.tr;Caglar.Yunculer@tcmb.gov.tr We examine the empirical link between loans and economic activity in Turkey with a focus on the components of loans by borrower (household/business) and by purpose of use (housing/personal) as well as currency of denomination (domestic/foreign). We estimate a separate VAR model for each type of loan and each GDP expenditure item to analyse whether different types of loans have different effects on economic activity and through what channels. According to our empirical results, credit shocks have statistically significant impact on economic activity, especially within the first two quarters. We find that shocks that expand household and TL-denominated business loans by the same rate have quite similar effects on private consumption, final domestic demand and GDP, while household loans has a much smaller impact on investment compared to business loans. While shocks to FX-denominated business loans have significant effect on total investment, they have much weaker effect on private consumption and GDP. The effect of housing loans on investment is found to be comparable to that of business loans, suggesting strong feedback between demand for housing and construction investment. We investigate the robustness of findings to alternative data samples, as well as some alternative identifying restrictions.