Measurement of liquidity effect from the view of the efficiency of monetary policies in Turkey

When deciding the monetary policies they implement, central banks have to takeinto account the interaction between the monetary dynamics and the interest rates.Therefore, the investigation of liquidity effect will help which monetary policy tollsshould be used in what ways in order to reach the macroeconomic targets of the countryin question. Hence monetary authorities are supposed to know the relationship betweenmonetary aggregates and interest rates in a certain monetary policy regime and thedeterminants that affect this relationship.This study aims to examine the effectiveness of the monetary program between1990:1-2003:4 period that the Turkish Central Bank has implemented by measuring theliquidity effect in Turkey, by means of VAR methodology. The model enables us toexamine the liquidity effect and not only helps to evaluate the effectiveness of themonetary policy but also examines the relationship between the monetary measuresused in the implementation of monetary policies and the other macro variables. Interestrates were examined in terms of a dynamic response to a shock in monetary policies,currency in circulation, free reserves and different monetary measures like M1 and M2.According to the results of the estimates, the reaction of the interest rates to a shockapplied to free reserves and M1 in an increasing trend was negative. When the impact ofthe monetary shock on the other macro economic variables were examined, theoreticalexpectations mostly came true. In the light of these results, monetary shocks in Turkeywill cause interest rates to fall down in short term and industrial production to go up. Inthis means, due to the existence of the liquidity effect; it might be claimed that thepossible stability aggravating effect of economic policies to increase production, whensupported by short term expanding monetary policies, would be too limited.