Effectiveness of the interest rate corridor as a monetary policy tool: Example of the Central Bank of the Republic of Turkey

After the global crisis, unconventional monetary policy instruments were needed to effectively intervene in the excessive financial volatility. Non-traditional monetary policy instruments have enabled central banks to respond to markets faster and more effectively in the face of unexpected situations. In this study, the interest rate corridor system has been examined to contribute to a better understanding of its effectiveness on the exchange rate channel. In this context, first of all, the changes in the monetary policy instruments in the post-2008 crisis period and the reasons for this change were investigated. Then, the interest rate corridor strategies of selected central banks were examined. The purpose of the implementation of the interest rate corridor instrument, which the CBRT started to use since the end of 2010, and the targets of the CBRT were examined. In the last part of the study, the interest rate corridor system implemented by the CBRT to support financial stability is analyzed using the monthly data for the 2010-2018 period. The data set used the overnight borrowing interest rate, interest rate corridor width, real effective exchange rate, M3 money supply, monthly average closing values of BIST 100 index, annual percentage change rates of inflation and overnight lending interest rate. Eviews 10 program was used for analysis. VAR model is established and Vector error correction model (VEC) is made. As a result of the study, long-term relationship between the variables was determined and Granger causality analysis was performed. It was seen that the interest rate corridor instrument provided the Central Bank with the advantage of being more flexible and effective in order to realize its monetary policy targets. According to the findings of VAR analysis, the interest rate corridor instrument implemented by the Central Bank to support financial stability was found to be effective in supporting the economic literature on the exchange rate channel.