Financial cycle drug hypotesis and monetary policy effetiveness: Example of Turkey

The 2008 global financial crisis differed from its predecessors in the way it unfolded and spread. The existing literature was insufficient to explain this crisis and therefore the debates on the subject continued. While this financial crisis brought about new debates on central banks' policy approach, implementation and the effectiveness of their instruments, it also changed the ultimate objective of central banks to be reconsidered in favor of financial stability as well as price stability. The ineffectiveness of conventional policy instruments in the recovery from the Great Recession led central banks to develop unconventional policy instruments. In the light of the inability to exit the crisis with the existing means and the debates over the existing economic approaches to end the crisis, a new hypothesis was put forward: "the financial cycle stagnation hypothesis". The hypothesis put forward by the BIS is still in the developmental stage and reveals that the 2008 global financial crisis is actually a stage of the financial cycle and that it may take time to get out of this situation with current policy practices. In this study, while estimating the financial cycle for the Turkish economy, which has been the subject of an increasing number of studies, the policy effectiveness of interest rates, one of the monetary policy instruments, on loans over the period analyzed is questioned. These evaluations start with the estimation of the financial cycle under the external debt constraint in the first stage and then the loans, which are considered as one of the best representatives of the financial cycle, are analyzed in terms of the real sector and households. In the following part of the study, the effectiveness of the interest rate as a central bank policy instrument is analyzed in terms of real sector, household and financial sector loans.