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An interest-rate-spread-based measure of Turkish monetary policy

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A coherent method to measure the effectiveness of a monetary policy improves the monetary authority’s management capacity and renders the possibility of applying sound policies prior to and during a crisis. The trend in employing complicated and ambiguity-bearing unconventional monetary tools in the aftermath of the 2008 crisis has increased the value of such a method. The aim of this article is to introduce a coherent and consistent monetary policy evaluation method for Turkey. Accordingly, we suggest that innovations in the spread between overnight interest rates and Treasury auction interest rates are informative for exchange rate, output, and prices. Empirical evidence for this identification reveals that positive innovation in spread (implying a tight monetary policy measure) decreases output temporarily, permanently decreases prices, and appreciates local currency. This result is also robust to alternative specifications.

Keywords: E32; E52; E58; business cycles; interest rate spreads; monetary policy evaluation

Document Type: Research Article


Affiliations: 1: Department of Economics, Bilkent University, Ankara, 06800, Turkey 2: Department of Banking and Finance, Yildirim Beyazit University, Ankara, 06690, Turkey 3: Research and Fund Management Directorate, Central Bank of the Turkish Republic of Northern Cyprus, Bedrettin Demirel Cad., Lefkoşa, KKTC, Via Mersin 10, Cyprus, Turkey

Publication date: 2014-05-24

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