Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey

Abstract The target of monetary policy is generally set as to create an environment of manageable employment and affordable long-term interest rates. However, priorities of central banks may differ depending on economic and financial circumstances of individual countries. Modern approaches to monetary policy transmission can be grouped under two headings, Money View and Credit View. The money view concentrates on interest rates to explain the effects of monetary policy on aggregate spending by creating an interest rate channel. The credit channel transmission approach focuses on the supply of credits by banks following a monetary policy shift in interest rates. In 2010, the Central Bank of Turkey (CBT) developed an interest rate corridor shaped by one-week and overnight repo lending to the financial banks to absorb excessive volatility caused by short-term capital inflows. Under this framework, the CBT implements its monetary policy in two ways; firstly it can alter the interest rates of weekly repo as well as O/N lending rate. Secondly, it can configure the funding structure it provides to the financial intermediaries. In such a framework, the interest rate transmission mechanism has been operated by two benchmark interest rates, one of which is the weighted average of the cost of funds provided by the CBT and the other is the interest rate in Borsa Istanbul (BIST) money market transactions at an overnight maturity. There is a strong co-movement between the interest rates and they are affected by the movements in the CBT lending rate in both directions. Interest rates applied to deposits and loans by banks are affected by the policy rate (CBT Average Funding Rate) and the market rate (BIST O/N Repo Rate).

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Safe Assets, Liquidity, and Monetary Policy

American Economic Journal Macroeconomics ◽

10.1257/mac.20150073 ◽

2017 ◽

Vol 9 (2) ◽

pp. 182-227 ◽

Cited By ~ 6

Author(s):

Pierpaolo Benigno ◽

Salvatore Nisticò

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Risk Sharing ◽

Balance Sheet ◽

Multiple Assets ◽

Interest Rate Spreads ◽

The Interest Rate ◽

Liquidity Shock ◽

Deep Recession

This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and “pseudo-safe” assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank’s balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers. (JEL E31, E32, E43, E44, E52)

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“WAIT-AND-SEE” MONETARY POLICY

Macroeconomic Dynamics ◽

10.1017/s1365100517000451 ◽

2017 ◽

Vol 23 (5) ◽

pp. 1793-1814 ◽

Cited By ~ 2

Author(s):

Xiaowen Lei ◽

Michael C. Tseng

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Taylor Rule ◽

Adjustment Costs ◽

Optimal Timing ◽

Bank Of Canada ◽

Wait And See ◽

The Interest Rate ◽

Better Than

This paper develops a model of the optimal timing of interest rate changes. With fixed adjustment costs and ongoing uncertainty, changing the interest rate involves the exercise of an option. Optimal policy therefore has a “wait-and-see” component, which can be quantified using option pricing techniques. We show that increased uncertainty makes the central bank more reluctant to change its target interest rate, and argue that this helps explain recent observed deviations from the Taylor Rule. An optimal wait-and-see policy fits the target interest rates of the Fed and Bank of Canada better than the Taylor Rule.

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Interest rates and prices causality in the Czech Republic – Granger approach

Agricultural Economics (Zemědělská ekonomika) ◽

10.17221/2/2009-agricecon ◽

2009 ◽

Vol 55 (No. 7) ◽

pp. 347-356 ◽

Cited By ~ 1

Author(s):

J. Poměnková ◽

S. Kapounek

Keyword(s):

Monetary Policy ◽

Czech Republic ◽

Interest Rate ◽

Interest Rates ◽

Inflation Rate ◽

Aggregate Demand ◽

Real Economy ◽

Investment Activity ◽

The Czech Republic ◽

The Interest Rate

Monetary policy analysis concerns both the assumptions of the transmission mechanism and the direction of causality between the nominal (i.e. the money) and real economy. The traditional channel of monetary policy implementation works via the interest rate changes and their impact on the investment activity and the aggregate demand. Altering the relationship between the aggregate demand and supply then impacts the general price level and hence inflation. Alternatively, the Post-Keynesians postulate money as a residual. In their approach, banks credit in response to the movements in investment activities and demand for money. In this paper, the authors use the VAR (i.e. the vector autoregressive) approach applied to the “Taylor Rule” concept to identify the mechanism and impact of the monetary policy in the small open post-transformation economy of the Czech Republic. The causality (in the Granger sense) between the interest rate and prices in the Czech Republic is then identified. The two alternative modelling approaches are tested. First, there is the standard VAR analysis with the lagged values of interest rate, inflation and economic growth as explanatory variables. This model shows one way causality (in the Granger sense) between the inflation rate and interest rate (i.e. the inflation rate is (Granger) caused by the lagged interest rate). Secondly, the lead (instead of lagged) values of the interest rate, inflation rate and real exchange rate are used. This estimate shows one way causality between the inflation rate and interest rate in the sense that interest rate is caused by the lead (i.e. the expected future) inflation rate. The assumptions based on money as a residual of the economic process were rejected in both models.

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A FINANCIAL ANALYSIS OF RESWITCHING

REVISTA PROCESOS DE MERCADO ◽

10.52195/pm.v18i1.710 ◽

2021 ◽

pp. 220-244

Author(s):

Rafael García Iborra

Keyword(s):

Interest Rate ◽

Business Cycle ◽

Interest Rates ◽

Inverse Relationship ◽

Financial Analysis ◽

Banking System ◽

Weighted Average ◽

Business Cycle Theory ◽

Natural Level ◽

The Interest Rate

The classical Austrian Business Cycle Theory (ABCT) is based on an inverse relationship between the so-called Average Period of Production (APP) or ‘roundaboutness’ and the interest rate. According to Böhm-Bawerk (1884 [1891]), the APP is the weighted average time that a unit of labor is locked up in the production process1; moreover, there is a positive relationship between savings (the ‘subsistence fund’) and the APP: the higher the latter the higher the former, which implies an inverse relationship between interest rates and the APP. Thus, a lower interest rate will lead to a higher APP ceteris paribus. Hayek (2008) based his Hayekian triangles on Böhm-Bawerk’s work: a lower (higher) interest rate leads to a more (less) rounda- bout structure of production, increasing (decreasing) the APP. Including Mises’s (1921) business cycle theory into the analysis, whenever the interest rate is pushed lower than its ‘natural level’, either by the central bank or the banking system, there is an unsus- tainable extension of the APP that will generate an economic boom; the crisis will irremediably follow, as the APP will pull back towards its natural level. From this brief characterization of the ABCT, it is easy to notice the key role of the inverse relationship between interest rates and roundaboutness; without it, there is no connection from changes in interest rates and roundaboutness, and the ABCT falls apart. The reswitching of techniques is precisely a counterexample to that relationship, as it claims there are situations in which lower interest rates do not lead to more roundabout productive struc- tures. The organization of this paper is as follows: the next section describes the reswitching of techniques as stated by Samuelson (1966) and the implication for the classical ABCT, based on a phys- ical measure of roundaboutness; section 3 analyzes the alternative of applying corporate finance to the ABCT following Cachanosky and Lewin (2014). Section 4 is a financial analysis of Samuelson’s example, argues why modified duration should replace Böhm- Bawerk’s APP as a measure of roundaboutness, and shows why it does not represent a paradox to the ABCT when the financial approach is used. Sections 5 and 6 address the question from two additional perspectives: a neoclassical with fully flexible prices but fixed techniques and the Austrian related dynamic efficiency.

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COMPARISON OF THE PASS-THROUGH SPEED MODELS OF DIFFERENT MARKETS: AN EMPIRICAL STUDY OF THE MARKETS OF MAINLAND CHINA AND TAIWAN

International Journal of Banking and Finance - Vol. 15, Number 2, 2020 ◽

10.32890/ijbf2020.15.1.9932 ◽

2020 ◽

Author(s):

Chi Ming Ho ◽

Wu Yih Lin

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Mainland China ◽

Rate Sensitivity ◽

Interest Rate Spread ◽

Spread Model ◽

Pass Through ◽

Loan Interest Rates ◽

The Interest Rate

This paper adopted the Boone Indicator, developed by Boone et al. (2008) and Van Leuvensteijn et al. (2011; 2013), to investigate the influence of different pass-through spread models in the competition among banks in emerging markets. With the market share of banks as a dependent variable and marginal cost as an independent variable, this paper probed into the competition among banks regarding the loan market to determine whether competition on the loan interest rates of banks affected the pass-through of monetary policy-related interest rates. After analyzing approximately 5,657 entries of records of the banking industries in Taiwan and mainland China, this paper reached three significant conclusions: 1) the Boone Indicator Model pointed out that, competition in the banking market of mainland China was more intense than that of Taiwan; 2) empirical research based on the Interest Rate Spread Model indicated that the spread of mainland China was lower than that of Taiwan; 3) the Passthrough Speed Model implied that, the interest rate sensitivity of the market of mainland China was higher than that of the Taiwan market. The above results indicate that the influence of monetary policy pass-through on the interest rate of the market in mainland China is faster than in Taiwan.

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Analysis of Macroeconomics Stability Control of ICI Countries (Indonesia, China, India) Based on Transmission of Monetary Policy through Interest Rate Channel

International Journal of Research and Review ◽

10.52403/ijrr.20210430 ◽

2021 ◽

Vol 8 (4) ◽

pp. 226-234

Author(s):

Annisa Anggreini Siswanto ◽

Ahmad Albar Tanjung ◽

Irsad Lubis

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Gross Domestic Product ◽

Interest Rates ◽

Domestic Product ◽

Economic Stability ◽

The Interest Rate ◽

Transmission Of Monetary Policy ◽

Interest Rate Channel

This study aims to analyze variable control of macroeconomic stability based on monetary policy transmission through interest rate channels in Indonesia, China, India (ICI). Variables used in the interest rate are rill interest rates, consumption, investment, gross domestic product, and inflation. This study used secondary data from 2000 to 2019. The results of the PVECM analysis through the interest rate channel show that the control of economic stability of the ICI country is carried out by investment variables and gross domestic product in the short term, while in the long run it is carried out by consumption, investment and gross domestic product. The results of the IRF analysis are the response stability of all variables is formed in the medium and long term periods. The results of the FEVD analysis show that there are variables that have the greatest contribution in the variable itself either in the short, medium, long term. The results of the interaction analysis of each variable transmission of monetary policy through interest rates can maintain and control the economic stability of the ICI country. Keywords: Interest Rate Channel, Interest Rate, Consumption, Investment, Gross Domestic Product, Inflation.

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Excess Real Interest Rates and the Inflation Targeting Regime in Brazil: Monetary Policy Ineffectiveness and Rentiers’ Interests

Applied Economics and Finance ◽

10.11114/aef.v5i6.3710 ◽

2018 ◽

Vol 5 (6) ◽

pp. 84

Author(s):

Fernando Ferrari Filho ◽

Marcelo Milan

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Inflation Targeting ◽

Negative Impact ◽

Policy Instruments ◽

Output Growth ◽

International Standards ◽

Real Interest Rates ◽

The Interest Rate

Brazil has had, since the middle 1990s, one of the highest real interest rates in the world, yet not one of the lowest inflation rates. By the end of that decade, an inflation targeting regime (ITR) was introduced. Real interest rates have remained extremely high for international standards, while macroeconomic performance has been dismal on the same grounds. This article argues that these results can be explained by, among others reasons, pressures from the rentiers to frame monetary policy in a way to sustain very high interest earnings in a context where inflation is not very sensitive to monetary policy instruments. Under the ITR, the interest rate seems to have been kept above what would be required to maintain low inflation under normal conditions (even if one assumes a demand-pull inflation, which is not necessarily the case), with a potentially negative impact on growth and employment. This is interpreted as an indicator of monetary policy ineffectiveness. On the empirical ground, this article compares interest rate, inflation, unemployment, and real output growth for Brazil with both ITR and non-ITR countries selected by judgment sampling.

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Interest Rate Pass-Through in Three EU Candidate Countries: The Case of Albania, North Macedonia and Serbia

Issues in Economics and Business ◽

10.5296/ieb.v5i2.15362 ◽

2019 ◽

Vol 5 (2) ◽

pp. 37

Author(s):

Igor Velickovski ◽

Daniela Mamuchevska

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Bank Lending ◽

Money Market ◽

Transmission Channel ◽

Speed Of Adjustment ◽

Rate Transmission ◽

Lending Rate ◽

Eu Candidate Countries ◽

Pass Through

The objective of the paper is to assess the interest rate pass-through in three EU candidate countries that is Albania, North Macedonia and Serbia. We rely on an error-correction model using monthly data over the period 2005-2019. Results suggest a complete interest rate pass-through in Albania, albeit it has been weakened during the economic and financial crisis. The relatively fast speed of adjustment indicates an effective interest rate transmission channel. In the Macedonian case, the changes of the monetary policy rate are transmitted completely to the bank lending rate, but not to the bank borrowing rate. The transmission via the money market rate has improved after the global economic and financial turmoil. In the case of Serbia, the results also suggest complete interest rate pass-through indicating that the monetary policy rate changes are transmitted into retail rates offered by the banks to savers and borrowers in the long run. Nevertheless, the speed of adjustment is relatively slow. In general, the estimated speed and extent of the response of money market interest rate and bank retail interest rates to changes in the monetary policy rate gives an indication of effective interest rate transmission channel in the case of Albania and Serbia. On the other hand, it is moderately effective in the case of North Macedonia given that the central bank rate changes affect mainly bank lending rate but not borrowing rate.

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MEKANISME SUKU BUNGA SBI SEBAGAI SASARAN OPERASIONAL KEBIJAKAN MONETER DAN VARIABEL MAKROEKONOMI INDONESIA: 1990.1 - 2007.4

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v11i1.234 ◽

2008 ◽

Vol 11 (1) ◽

Author(s):

Nova Riana Banjarnahor

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Inflation Targeting ◽

Vector Autoregressive ◽

Market Rate ◽

Empirical Ground ◽

Time Deposit ◽

The Interest Rate ◽

Rate Mechanism

Bank Indonesia has applied the Inflation Targeting Framework (ITF) to reach its single-final objective; stabilizing Rupiah reflected in the inflation and its exchange rate. The central bank of Indonesia uses the interest rate as his operational target to achieve the targeted inflation. Regardless of whether Bank Indonesia uses the Certificate of Bank Indonesia (SBI) or the money market rate (PUAB), on empirical ground the targeted inflation is hard to achieve.This paper analyzes the monetary policy of Bank Indonesia and its impact on macroeconomic variables. The application of Differenced Vector Autoregressive (DVAR) method shows that the monetary policy has a direct impact on the time deposit rate and an indirect impact on the exchange rate, money supply, gross domestic product and on consumer’s price index.JEL Classification: C32, E52, E58Keywords: SBI Interest Rate Mechanism, DVAR, IRF, FEVD

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Monetary Policy Shocks in the Russian Economy and Their Macroeconomic Effects

Economic Policy ◽

10.18288/1994-5124-2019-4-48-75 ◽

2019 ◽

Vol 14 (4) ◽

pp. 48-75

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Empirical Evidence ◽

Monetary Policy Shocks ◽

Interest Rate Policy ◽

Russian Economy ◽

Policy Shocks ◽

Rate Policy ◽

The Interest Rate

This section conducts an estimate of the impulse response function of key macroeconomic variables to monetary policy shocks in Russia. The estimates are carried out through a dynamic factor model (DFM) of the Russian economy with structural identification of shocks by imposing various sets of sign restrictions on the behavior of endogenous variables. We restricted first the monetary aggregate M2 only (a decrease in response to an increase of the Key rate), and then—simultaneously—M2, real effective exchange rate (an increase), and GDP (a decrease). We estimated the DFM using a large dataset of 58 macroeconomic and financial variables. The estimation results suggest that there is no decreasing response of consumer prices to an exogenous tightening of the interest rate policy of the Central Bank of Russia. This empirical evidence is supported implicitly by DFM-based predictions that under the imposition of such a decreasing response as an identifying restriction to the model, a positive interest rate shock is not transmitted through the interest rate channel of monetary policy to expected increases of the interest rates on commercial loans and private deposits. However, existing empirical evidence refutes this model-based result. Therefore, this study supports the view according to which a tightening of monetary policy in Russia is inefficient in terms of restraining inflation. In addition, monetary policy shocks negatively affect investments, retail sales, export and import, real wages, and employment. Different economic activities react differently to monetary policy shocks: export-oriented activities are not sensitive to these shocks, whereas domestic pro-cyclical activities (e.g. construction) can be substantially depressed in response to unexpected increases of interest rates. Finally, the expectations of economic agents are also significantly affected by shocks in the interest rate policy of the Bank of Russia.

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