Tugas Ekonomi Koperasi Ke-3

Nama : Rico Prasetyo
NPM : 29214274
Kelas : 2EB28

JURNAL INTERNASIONAL

International Journal of Economics and Financial Issues

Vol. 3, No. 4, 2013, pp.874-884

ISSN: 2146-4138

www.econjournals.com

The Interest Rate Channel in Turkey:

An Investigation with Kalman Filter Approach

Taha Bahadır Sarac

Department of Economics,

Faculty of Economics and Administrative Sciences,

Nigde University, Turkey. Email: tbsarac@nigde.edu.tr

Okyay Ucan

Department of Economics,

Faculty of Economics and Administrative Sciences,

Nigde University, Turkey. Email: okyayu@hotmail.com

ABSTRACT: The monetary authority affects the aggregate demand and investment expenditure via controlling short run interest rates. It is important to satisfy the price stability together with working interest rate channel. This study aims to investigate the validity of interest rate channel in Turkey since the inflation targeting period starting with the year 2002. The sample period covers quarterly data from 1990:1 to 2011:3. It is stated that after the 2002 efficiency of interest rate channel increases.

Keywords: Kalman Filter; Markov Switching; Monetary Policy; Turkey

JEL Classifications: C32; C34; E52

1. Introduction

The economy policies generally are divided into monetary policy and fiscal policy. While fiscal policy uses the government expenditures and taxes as the instruments, monetary policy uses money supply, short term interest rate, discount rate and etc. However, there are differences of opinion among the economists, i.e,which one is more effective on the economic activity level. Classical economics that is the dominant economic thought up to the Great Depression emhasizes that there is no need any government intervention and economies are in balance. Moreover, any disequilibrium is equalized by the wages and flexible prices.

Following by the classical economic thought, the dominant one is the Keynesian thought in which economies with underemployment are in equilibrium. Keynesian thought stresses that fiscal policy is more effective than monetary policy due to the liquidity trap and zero sensitivity of investment to the interest rates. In the beginning of 1960’s monetary thought come on the scene and express that money supply has a fundamental role on determining the economic performance.

If we look over the Turkish economy, up to the 2000 it is seen that monetary pociy is restricted over against expansionary fiscal policy. However folowing by the economic crisis in the 2001, as part of the inflation targeting significant progress toward increasing the independence of executing the monetary policy of central bank has made. In this context, inhibiting the treasury from borrowing short term funds from central bank may be thought as an important development. It indicates that the macroeconomic stability is satisfied both by performing the structural reform and insisting on fiscal discipline together with increasing the applicability of inflation targeting regime. As a result of this macroeconomic stability, it emphasizes that efficiency of central bank gradually increases. So, contrary to the 1990’s central bank is more effective for achieving the price stability by using monetary transmission mechanism during this inflation targeting period. Monetary transmission mechanisms that covers the effect of monetary policy to the real macroeconomic variables, such as aggregate supply, unemployment and inflation have been examined through interest rate channel, exchange rate channel, bank credit channel and equity price channel. Beside this, it may be examined The Interest Rate Channel in Turkey: An Investigation with Kalman Filter Approach by dividing into two channels so called interest rate and bank credit channels. Following by an expansionary monetary policy, interest rate falls and this causes a rise in investment and GDP at the interest rate channel. At the bank credit side, an expansionary monetary policy increases the the bank reserves and bank deposits together with a rise in quantity of bank loans available. Therefore, this increase will cause investment spending to rise, leading an increase in GDP.

In this study we aim to test the validty of interest rate channel for Turkish economy. Although there are huge number of study dealing with this, most of them use causality tests to validate the monetary transmission mechanisms. However, causality test does not allow to observe the trend of monetary transmission mechanism along the whole time period.

At the interest rate channel known as traditional Keynesian monetary transmission mechanism, effects of interest rate to the the economy are founded on the money market views of Keynes. Keynesian model emphasizes that equilibrium interest rate is determined by money demand and money supply. That is why, interest rate level can be adjusted by monetary policy leading to an increase in investment. However, at the interest rate channel it is stated that a fall in the interest rate causes a rise not only in investment but also in consumption expenditure. The sticky price assumption looms large in this channel. As to this, following by a fall in the short run nominal interest rates, lower interest rates then lead to decrease in short run real interest rates. According to the rational expectation theory, it is agreed that long term real interest rates will be the average of the expected short term

interest rates. Therefore, as seen in Figure 1, this fall in long term real interest rates affect the firms’s investment and consumption expenditure (Mishkin, 1995; Kutter and Mosser; 2002).

The purpose of this paper is to contribute to the existing literature by analysing the monetary

transmission mechanism by using Markov-Switching method and Kalman Filter that allows to observe the effect of inflation targeting regime on interest rate channel in the given period. The paper is organized as follows. Section 1 discusses the theory. Section 2 summarizes the literature. The econometric methods and analysis are presented in Section 3. The overall conclusions are in the final section.

2. Literature Review

Following by Friedman and Schwartz (1963) who denote money supply affecting the real

economy, most of the economist agree that monetary policies affect the real economy at least in the short run. However there is no consensus how monetary policy affect the real economy. Thus, there are lots of study resulting several conclusions about monetary transmission mechanisms so called “black box” (Bernanke ve Gertler, 1995, 1). Table 1 presents the summary of this literature review about interest rate channel.

3. Econometric Analysis

This part is divided into two sections. First one is econometric method and second one is econometric analysis.

4. Conclusions

While the Central Bank of Republic of Turkey implements implicit inflation targeting from 2002 to 2006, from 2006 to present explicit inflation targeting has been implemented. Following by the inflation targeting regime practice, it is observed that a noticeably decrease in the inflation level occurs. It is approximately 70.01 % and 11.6 % in the 1983-2001 and 2002-2011 periods respectively . This case indicates that inflation targeting regime is an effective monetary policy instrument. The efficient monetary policy means monetary transmission mechanism works well. 

This study aims to investigate the economic influences of the inflation targeting regime on the interest rate channel. Results show that inflation targeting regime is effective not only on decreasingthe inflation rates but also on increasing the performance of interest rate channel. In other words, Central Bank is effective on both consumption and investment expenditure in the inflation targeting regime period. Especially, it is stated that its ability on controlling the consumption expenditure increases.