Functioning and effectiveness of monetary transmission mechanisms: Turkey applications

The central banks can achieve objectives through a host of measures. Monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism can be characterised by types of parameters such as long maturity, economic variables and uncertain time lags. Therefore, it is difficult to predict the precise effect of monetary policy actions on the economy and price level. Monetary policy is currently in the center of discussions about how to promote sustainable growth and low inflation.

This study provides an overview of the transmission mechanisms of monetary policy, starting with the traditional interest rate channels, going on to channels operating through other asset prices, and then on to the so-called credit channels. The paper then discusses the implications from this literature for how central banks might best conduct monetary policy.

Theoretical principles of the monetary transmission channels are examined by investigating the effectiveness of monetary transmission channels in terms of relationships between monetary policies and the real economy. This is done in order to determine which monetary channels are actively working by utilizing vector auto regression model.

In this paper I provide an overview of transmission mechanisms of monetary policy. The results of the vector auto regression model revealed that traditional interest rate channels of the monetary transmission mechanism work actively in Turkey. The results also indicate that exchange rate channel does not play a decisive role on the level of production even though significant effects on general prices can be expressed through exchange rate channels. Observations suggest that stock quotes and credit channels are not working effectively.

Keywords: Monetary Transmission Mechanism, Monetary Transmission Channels, Vector Auto Regression.