The effectiveness of monetary transmission under inflation targeting regime in Turkey

The effect of monetary policy instruments on the level of real production and prices is realized through channels of monetary transmission mechanisms. Accordingly, monetary transmission channels affect the output and the prices through interest rate, bank lending, exchange rate, asset prices and expectations. The Central Bank of the executive of the monetary policy aims to maintain price stability in Turkey using monetary policy tools. In this context, the inflation rate plays an important role in the formation of the monetary policy. In this study, the effectiveness of monetary transmission mechanism channels were analyzed under the inflation targeting regime in Turkey using structural VAR method. According to the results of impulse response functions and variance decomposition based on the structural VAR model, the interest rate and credit volume instruments used by the CBRT as a means of monetary policy are influential on inflation. The findings show that bank lending channel, the interest rate channel, and the exchange rate channel are effective.