The relationship between monetary policy and asset prices

The developments in the US housing and real estate sectors played an important role during the Global Financial Crisis of 2008. The findings of previous theoretical and empirical studies have revealed that there was a strong relationship between the expansionary monetary policy that included high liquidity and low interest rates in the US economy and the housing price bubble, which played a central role in the development of the crisis. These developments have revealed the importance of the relationship between monetary policies and asset prices. In fact, the contributions made to the literature in the post-crisis period indicate that asset prices should play a clearer role in monetary policy practices. In this direction, the present study aims to conduct an empirical investigation of the relationship between monetary policies and asset prices in the Turkish economy. In line with this purpose, the SVAR approach was used in the study. The period included within the scope of the present study was determined as 2011:5-2018:5 to reach the maximum number of observations in all data. According to the findings obtained, it is observed that the only significant reaction of monetary policies to the variables included within the model was to real effective exchange rate and treasury bill rate. Additionally, the effects of monetary policies on real effective exchange rate, housing price index, BIST 100 index, treasury bill rate and interest of government securities were found to be significant. The results reveal that the Central Bank of the Republic of Turkey (CBRT) conducts only policies in consideration of exchange rate shocks. Turkey's production structure, which is largely based on importation, cause the developments in exchange rates to be effective on inflation. This situation emphasizes that it is necessary for the CBRT to take exchange rates into consideration in the process of establishing monetary policies. In addition, the findings show that CBRT's monetary policy decisions affect the economy through asset prices. These results reveal as a policy recommendation the necessity that CBRT considers asset prices in the policy-making process.