Optimal monetary and macroprudential policies in Turkey

The Global Financial Crisis of 2008 has revealed serious problems on the financial stability and macroeconomic stability. Because conventional monetary policies could not alone overcome these problems, it has brought along the use of alternative policy instruments. In this context, the use of macro-prudential policies in the post-crisis period has been an important milestone in terms of macro-economic policies. Starting from such a transformation in the macroeconomic policies, this study aims to determine the effectivness of macro-prudential policies, which were commonly used in many countries after the crisis, in providing financial and macroeconomic stability in Turkey. In line with this purpose, a New Keynesian DSGE model, which is designed to contain a macro-prudential policy tool, is estimated by using Bayesian techniques for Turkish economy. Quarterly data for seven variables used in this study covers the period between 2003 and 2015. The general findings of the study support that macro-prudential policies are particularly effective in reducing financial volatility. Another important result of the study is that monetary policy reaction to credit expansion and the use of macro-prudential policy together improve macro-economic stability and, thus, ensure the welfare increase under most economic conditions. Keywords : Financial Stability, Macro-Prudential Policies, DSGE Models, Optimal Policy Rules