Interactions between business cycles, financial cycles, and monetary policy in Turkey

This study aims to investigate the relationship between business and financial cycles and the connections between them and monetary policy in the Turkish economy. First of all, the basic characteristics of the business and financial cycles were determined by BBQ and HP methods. Then, the relationship between business and financial cycles was examined using cross-correlation analysis, Hacker and Hatemi-J (2006) symmetric and Hatemi-J (2012) asymmetric causality tests. The relationship between financial cycles and monetary policy cycles was tested with the above symmetric and asymmetric methods too. Lastly, the augmented Taylor Rule equation with the financial cycle variable was estimated by the MS method. The first of many notable findings from the analyses is that the contraction phases of financial cycles take longer and are more costly than the contraction phases of business cycles. Second, financial cycles the are lead and cause of business cycles. The two cycles are synchronized especially in moments of recession and crisis. The third is the existence of asymmetric causality relationships from the contraction phases of the financial cycles to the expansionary monetary policy and from the expansionary monetary policy to the expansion phases of the financial cycles. Other important results are found out by the augmented Taylor Rule equation. According to the equation, the CBRT focused on price stability and financial stability as a result of its inflation targeting strategy in the high-interest rate regime. On the other hand, the CBRT targeted the output gap neither in the high-interest rate regime nor in the low-interest rate regime. Moreover, the theoretical and statistical relations between variables are disappeared in the low-interest rate regime. It is believed that the reasons are the dominance of post-crisis liquidity policies, and the use of alternative interest rates rather than the policy rate when the market rate of interest was desired to increase in this period. However, considering the potential effects of financial instability on the real economy, it is thought that the CBRT should definitely take financial cycles into account in its policy decisions.