Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006)

This study aimed to test the money base, money supply, credit capacity, industrial production index, interest rates, inflation and real exchange rate data of Turkey during the years 1997 – 2006. These were tested through the monetary transmission mecha-nism and passive money hypothesis, using the vector error correction model-based causality test. Empirical findings showed that the passive money supply hypothesis of the new Keynesian economy is supported in part by accommodationalist views and differs from those of structuralist and liquidity preference theories. However, the monetary transmission mechanism has established that long-term money supply only affects general price levels, while production is influenced by interest rates in the new period of the Turkish economy. Empirical findings show that in this new period, interest transmission mechanisms are at the forefront.