Abstract:

Since 2010, the Central Bank of the Republic of Turkey (CBRT) has been applying a new monetary policy strategy that takes into account financial stability along with price stability. The acceleration of capital movements as a result of the global increase in financialization causes the fluctuations in exchange rates to intensify. The fluctuations in the exchange rate cause the domestic price stability to deteriorate due to the foreign input-dependent production system of the Turkish economy. Monetary policy is an appropriate tool that can be used to limit exchange rate fluctuations and keep inflation under control in countries where capital is highly sensitive to interest rates. The motivation of this study is to empirically analyze the effects of monetary policy interest rate and market interest rate on inflation and exchange rate in Turkey. The relations between the policy rate, market rate, nominal exchange rate and inflation (CPI) applied by the Central Bank were analyzed using VAR analysis, impulse response functions and Granger Causality tests. The findings of the study are that the causality relationship of monetary policy in Turkey is from the 2-year bond rate, that is, from the indicative interest rate used in the market, to the policy rate. In addition, one-way causality relationship from market interest to exchange rate and from exchange rate to inflation has been determined. Changes in the bond interest rates are the cause of exchange rate fluctuations, and the level of inflation is also determined by exchange rate changes. Results obtained through stimulus-response functions and variance decomposition overlap with causality results.

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