Monetary policy pass-through to lending rates in Turkey: An empirical investigation

In today's world, the main policy instrument of a central bank is short-term interest rates. Changes in policy interest rates by central banks affect money market rates. Then, changes in money market rates alter long-term interest rates on loans, deposits and bonds. This process is called interest rate pass-through. An efficient interest rate pass-through mechanism implies that changes in the central bank's policy rate are transmitted to a very large extent to long-term interest rates, which affect aggregate demand, output and inflation. High and fast pass-through implies that central bank decisions affect the real economy easily and quickly. The aim of this thesis is to analyze the pass-through of monetary policy to lending rates in Turkey using monthly data for the period January 2011-March 2021. In this framework, both linear and nonlinear estimation methods are employed in this study. The findings obtained from these estimation methods are quite different. Considering the findings of the nonlinear estimation method, which is considered to yield more efficient results, the coefficient of interest rate pass-through is greater than unity. This result suggests that banks take into account a risk premium when setting lending rates and that there is an additional risk premium in lending rates in Turkey.