Abstract:

This paper presents a mathematical model, which examines how the effect of monetary policy on supply of bank loans depends on currency mismatches in banks’ balance sheets. The model explores bank lending channel would be operative when banks, with a low risk perception, finance government through securities by their foreign denominated sources of borrowing, which results in currency risk. In this sense, the importance of the quality of banks’ external finance that are supposed to replace lost deposits are also emphasized. In order to highlight these implications of the model for Turkey before the crises in 2000-2001, these assumptions, in particular, are discussed throughout the paper.

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