The relationship of financial innovations and monetary policy: The case of Turkey

In the last half century, the world has witnessed a rapid increase in economic growth, globalization, and financial liberalization. Authorities of countries have endeavored to guide this process through monetary policy tools. The investments required for economic growth have been attempted to be supported by the surplus funds generated in financial markets, leading to the rapid development of the financial sector. The financial sector has undergone a continuous process of innovation, increasing financial instrument diversity, influenced by technological advancements, growing competition, and implemented monetary policies. However, alongside the new opportunities that increasing financial innovations present for economic and social development, there remains an uncertainty regarding the new challenges and risks they may impose on monetary policies. The purpose of this study is to examine the relationship between financial innovations and implemented monetary policy tools in Turkey using data from the period 2014:1-2022:4. In this context, the Granger and Todo Yamamato Causality Test were applied in the study, using credit card usage volume as an indicator of financial innovation and the policy interest rate variable as an indicator of monetary policy. The results obtained from both causality tests indicate that there is no causality relationship from financial innovations to monetary policy. However, according to the Granger causality test, a unidirectional causality relationship from monetary policy to financial innovations has been identified.