The role of the credit channel in monetary policy transmission: A Survey based analysis of Turkey

The amount of loans granted by the financial sector to the real sector can be accelerated beyond the implications of the classical interest channel as a result of external financing premium. This effect is called "credit channel of monetary policy" in the central banking literature. This study analyses the credit channel of monetary policy in Turkey and its effect on inflation and output for the period of 2004Q3-2016Q4. In the study, to identify the sub components of credit channel, Bank Loans Tendency Survey (BLTS) of the Central Bank of the Republic of Turkey on quarterly frequency have benefited. The credit channel is decomposed as the borrower's balance sheet channel and the bank lending channel using the methodology in Ciccarelli et al. (2015). Identification of the sub channels and through which mechanism monetary policy is transferred to financial intermediation and to the real economic activity will contribute to the policy implementation process. The results of the study would be beneficial to determine the appropriate policy mix. The results of the study of Ciccarelli et al. (2015) imply that credit channel amplifies the impact of monetary policy on production and price level. In Euro Area, all sub channels of credit channel seem important whereas the bank lending channel is more powerful for corporate loans and demand channel is more effective for mortgage loans. In the US, firms' balance sheet is effective in transmission of monetary policy to real economic activity, however, bank lending channel seems ineffective. In Turkey, credit supply channel is more effective than credit demand channel in terms of monetary policy transmission mechanism. Moreover, monetary policy is transmitted to real activity via firm's balance sheet channel. When monetary policy, real economy and credit developments are considered for Turkey, the result of the study show that borrower's balance sheet channel should be included into the analysis of monetary policy transmission mechanism.