Effectiveness of the interest rate transmission channel under different exchange rate regimes: Empirical findings from the Turkish economy

This study investigates the effectiveness of the interest rate transmission mechanism under different exchange rate regimes in the Turkish economy. The study employs a threshold-VAR model, covering the period from 2002:1 to 2023:12. The model includes short-term interest rates, nominal exchange rate, industrial production index, and consumer price index as endogenous variables, and annual percentage change in the nominal exchange rate as the threshold variable. The empirical results indicate that an optimal threshold value of 12.21%. That is, increases in the nominal exchange rate at or above this value are defined as periods dominated by a high exchange rate regime. The findings imply that the interest rate transmission channel is only effective for the Turkish economy in the low exchange rate regime. Keywords: Interest Rate Transmission Mechanism, Exchange Rate, Threshold-VAR