Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis

Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis

Title:

Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis

Number:

15/04

Author(s):

K. Azim Özdemir

Language:

English

Date:

January 2015

Abstract:

This paper investigates the importance of interest rate shocks in explaining macroeconomic dynamics during the relatively low-inflation period in Turkey after mid-2000s. For this purpose, we compute impulse response functions using not only VAR models but also multi-step ahead forecast regressions, which are referred as Local Projections. Estimations are carried out on two different monthly data sets, a set of conventional series and a newly constructed set of series for measuring real GDP, the price level and the exchange market pressure in Turkey. Impulse responses obtained from newly constructed series exhibit more plausible dynamics than the conventional series after an interest rate shock. Moreover, results from Local Projections show remarkably similar dynamic responses to those obtained from the VAR models. This finding can be interpreted as an evidence that the identified VAR models successfully capture the true relationships among the variables.

Keywords:

Monetary Policy, Identification, VAR, Local Projections, Interpolation

JEL Codes:

C32; E52; C82

Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis
CENTRAL BANK OF THE REPUBLIC OF TURKEY Head Office Anafartalar Mah. İstiklal Cad. No:10 06050 Ulus Altındağ Ankara Phone : (+90 312) 507 50 00 | Fax : (+90 312) 507 56 40