Is There an Interest Rate Channel for Monetary Policy in Turkey

The changes in monetary authority’s decisions may affect the behavior of economic agents and thus the level of aggregate demand. Namely; a change in the short term interest rate is made by the central bank directly affects the user cost of capital and firms’ decisions about investment expenditure. In the monetary policy literature, this mentioned process is defined as the interest rate channel. To guide policy makers it is important to investigate whether interest rate channel operates. Determination of the effect of short-term interest rate changes (increase or decrease) made by monetary authorities on the long-term interest rate is necessary for introducing the effects of the monetary authority’s decision on output. Because the changes in the short-term interest rates affect the investment and consumption decision by changing the long-term interest rate. The aim of this paper is to investigate empirically the interest rate channel of monetary transmission mechanism in Turkey for 1995:01-2008:9 periods. The findings showed the existence of interest rate channel. Because price stability in Turkey was satisfied after 2002, the functioning of interest rate channel has examined by dividing the sample into two sub-periods (1995:01-2002:02 and 2002:03-2008:09). The results present that the interest rate channel was operated only in the second sub-period.