Özet:

The study aims to examine the relationship between monetary policy and financial cycles in Turkey. For this purpose, Augmented Taylor Rule with financial cycles is estimated by employing quarterly data for the period 2003-2019 in Turkey. It is determined that the nonlinear model used in estimating the Augmented Taylor Rule provides a better estimation performance than the linear model. Two different regimes are operated in Turkey as high (2003:Q2-2008:Q4/2018:Q2-2019:Q2) and low (2009:Q1-2018:Q1/2019:Q3-2019:Q4) interest rate regimes during the period. The findings indicate that in the high-interest rate regime, price and financial stability are taken into account, not the output gap, in the decision of interest rates. However, in the low-interest regime, the theoretical and statistical connections between the interest rate and the other variables in the Taylor Rule are disappeared. The reason for this is thought to be the priority of meeting the liquidity needs of the economy and the use of alternative instruments such as the interest rate corridor and late liquidity window rather than the policy rate. Thus, the instabilities in financial cycles are neglected in tlow-interestest regime. However, policymakers should adopt an interest rate policy that cconsidersthe financial cycles in the fight against financial instability, taking into account the fragility of the economy.

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