The effect of financial development and innovations on monetary policy: The case of Turkey

Along with the globalization process, world economy has started to reform since 1970. Developed Countries, for creating more profitable investment areas for their capital accumulation, and developing countries for capturing required capital accumulation financing their economic growth, have applied policies leading to financial market liberalization and removed their financial markets off the quantity and price limitations. With the applications of financial liberalisation, the controls on capital movement have been removed, the developments on information and communication technology have enabled the movement of funds on world scale in developed countries, and the globalisation and integration of financial markets have been promoted.Although there is not a firm decision, financial innovations contributes positively to the developments of the markets. However, innovation process creates uncertainty on the money supply and demand, influences the decision making process of the monetary authorities and results in uncertainty in monetary policies.The purpose of this study is to test the casual relationship between financial development and innovations and monetary policy and to find the direction of casuality. For the Granger Casuality test, we used quarterly data fort he period 1996-2006. In the result of Granger Casuality test appied, the casuality runs from financial development and innovations to monetary policy.