Effects of monetary shocks on price stability in Turkey theory and practice (2002-2018)

Monetary policy shocks that occur willingly or involuntarily by monetary policy practitioners are divided into two: negative and positive shocks. Beyond doubt, these monetary policy shocks affect society both economically and socially. Although these shocks do not only affect societies economically, undoubtedly economic assets are the most affected ones. This thesis, conducted about financial stability in the economy and monetary shocks affecting factors such as price stability and inflation, investigates the effects of positive and negative monetary shocks on price stability in Turkey between 2002 and 2018. The thesis sheds light on today by discussing economic theories about the impact of the monetary shocks that occurred in the 60s and 70s and 80s, especially on the society and the general level of prices. In addition, the effects and deficiencies of the economic theories of these periods were addressed with an emphasis on the positive and negative aspects of the monetary shocks. Although monetary shocks usually occur as a result of practices that monetary policy practitioners sometimes voluntarily and sometimes involuntarily, monetary shocks can sometimes occur by market players. The acts of the players, namely banks, central bank, and society, as a result of monetary shocks have been explained by economic theories. In addition, the thesis investigates the behavior of policy practitioners by addressing the views of policymakers and society in the monetary shocks that occurred in the 60s and 70s and 80s, in order to reveal society's expectations of future stability and a fair share of income. In this thesis, which discusses the damages and benefits of monetary shocks, the recent past-time was discussed as a time frame and the current functioning was explained by shedding light on what happened in the past. In the study, the effects of monetary shocks on price stability in Turkey during the period 2002-2018 were investigated with the model created. The study focused on proving the theoretical decency of the relationship between monetary shocks and price stability, and revealing the emergence of this relationship. Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) analyses were used as the application method. In the application stage, M3 money supply, consumer price index, overnight interest rate, real exchange rate, industrial production index, and the world crude oil prices data were used to analyze the short- and long-term effects. The results of the models revealed the existence of short- and long-term relationships between the variables. Analysis results show that the industrial production index (IPI) has a positive and significant impact on interest rates both in the long term and in the short term.