Unconventional Interest Rate Corridor and the Monetary Transmission: Evidence from Turkey

Unconventional Interest Rate Corridor and the Monetary Transmission: Evidence from Turkey

16/08

March 2016

Central banks typically implement the monetary policy via a single policy rate within a narrow and symmetric interest rate corridor. On the other hand, the Central Bank of the Republic of Turkey (CBRT) has adopted an unconventional approach by using a multiple policy rate framework within an asymmetric and wide corridor since end-2010. During this period, the interbank rates were frequently allowed to deviate from the officially announced policy rates in order to respond to excessive global financial volatility. This approach complicated the transmission of monetary policy as the effective rates occasionally differed from the official rates, making it challenging to assess the stance of monetary policy. This study aims to shed light on the monetary policy stance and the monetary transmission mechanism during this period. To this end, we first present a simplified version of the CBRT’s monetary policy operational framework, highlighting the role of each parameter of the interest rate corridor for the transmission mechanism. We then examine the relationship between bank loan/deposit rates and multiple policy rates by using panel estimation methods and bank-level flow data. Our findings show that, from the traditional interest rate channel perspective, effective rates are more relevant than official rates for the transmission of monetary policy. Overnight interbank rates particularly play a key role in the pricing of loans and deposits. Our results also have implications for other central banks such as ECB or Fed, where the interbank money market rates occasionally deviated from the official policy rate due exceptional liquidity conditions following the global financial crisis. We argue that, in an environment of divergence between effective and official rates, interbank rate is a reasonable metric to assess the actual stance of monetary policy.

Monetary policy transmission mechanism, Interest rate corridor, Credit channel, Interest rate pass-through, Turkey

E44; E51; E52