Monetary transmission mechanisms in Turkey (2005-2019)

Today, despite the huge volume of studies, there is no consensus among economists regarding the functioning of the monetary transmission mechanism. This situation puts the central banks face to face with an important "election risk" in the policy design process. So much so that the design of policies within the framework of the transmission mechanism, which does not represent the structural properties of the economy, causes huge problems. Therefore, knowledge accumulation about the monetary transmission mechanism is very important in the policy design process. Hence, our study aims to contribute to the accumulation of knowledge on the operation of the monetary transmission mechanism in Turkey. Accordingly, the operation channels of the monetary transmission mechanism in the period between 2005 and 2019 have been examined using the techniques of Impact-Response Function and Variance Decomposition. Empirical evidence has determined that only the bank lending channel effectively operates in Turkey. Structural problems that increase the country's risk premium disrupt the effective functioning of the interest rate channel by preventing the fall in interest rates. In addition, the private sector, which is under liquidity constraint, is more sensitive to the volume of bank loans than interest rate while making investment decisions. The bank-based financial system in Turkey prevents the efficient operation of the asset price channel. The high dependence of the production structure on imported input also prevents the functioning of the exchange rate channel by reducing the sensitivity of imports to the exchange rate. The empirical findings obtained showed that the central bank should design its monetary policy applications through the bank credit channel in order to affect the real economy effectively. Of course, this fact poses a major constraint for the central bank's policy in Turkey. However, implementing policies within the framework of other transmission channels that do not function due to the structural characteristics of the country leads to significant policy failures. This situation may reduce the trust in central bank and make it difficult to use the efficient credit channel in the future. Accordingly, it is seen as the most effective method for the central bank to build its monetary policy strategy through the credit channel.