EFFECTIVENESS OF THE INTEREST RATE TRANSMISSION CHANNEL UNDER DIFFERENT EXCHANGE RATE REGIMES: EMPIRICAL FINDINGS FROM THE TURKISH ECONOMY

Abstract

Purpose: The primary aim of this paper is to investigate the effectiveness of the interest rate transmission channel in the Turkish economy for different exchange rate regimes.

Methodology: In this study, the TVAR model is estimated covering the period from 2002:1 to 2023:12. Furthermore, impulse response functions obtained from the linear VAR model are also included for comparison. The endogenous variables vector consists of the short-term interest rate, the nominal exchange rate, industrial production, and consumer prices, whereas the annual percentage change in the nominal exchange rate is used as the threshold factor.

Results: Based on empirical findings, 12.21% is calculated as the optimal threshold value. Thus, periods of higher exchange rates are defined as periods in which the nominal exchange rate increases at or above this value. The empirical results from the threshold VAR model, the interest rate transmission channel is only effective for the Turkish economy in the lower exchange rate regime.

Conclusion: The study concludes that, to increase the efficiency of the interest rate channel, the central bank should also consider the exchange rate markets.