Abstract:

Purpose- The CBRT announced in April 2010 that included financial stability in its target function, and in November 2010 started implementing modified monetary policy strategy with new monetary policy tools. In this study, the effectiveness of modified monetary policy was questioned. Thus, primarily the impacts of intermediate targets on price stability, then the impacts of policy instruments on intermediate targets have been investigated. Methodology- The Johansen cointegration test and VECM are used to show long-run relationships and causality between variables. Then, Granger causality test is used to examine short-run causality between the variables. Findings- In the long run, while credit supply and USD exchange rate affect price level, the average funding rate doesn`t affect the price level. Credit supply, USD exchange rate and average funding rate affect TUFE in the short run. In addition, in the long run, while the required reserve ratio and interest corridor affect credit supply; average funding rate and policy interest rate doesn`t affect credit supply. Moreover, in the long run, policy instruments do not have an impact on the USD exchange rate. Reserve requirements cause changes in credit supply, and average funding rate causes changes in USD exchange rate in the short run. Conclusion- The exchange rate channel and the credit channel is valid in Turkey. In addition, while required reserves and interest rate corridor have a predictable impact on the credit supply, no policy instrument has a predictable effect on the exchange rate.

Keywords: