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Analysis of the monetary stance of Turkey between 2011 and 2018 with a new monetary conditions index: the roles of government bond yields and the exchange rate

Kaptan, Savaş
Measuring the monetary policy stance of central banks is a much-debated issue in the literature. The changing economic dynamics over the time and different structures of economies have made impossible to use only short term interest rates, monetary aggregates or money market rates for analyzing the monetary stance. Accordingly, comprehensive monetary conditions indexes have been discovered and some central banks have started to use them as an operational target. In line with these developments, the main aim in this study is measuring the monetary stance in Turkey and constructing a monetary conditions index using government debt securities and exchange rates in addition to the funding rate of the Central Bank of the Republic of Turkey considering the distinctive economic structure and dynamics of the country. In order to determine the weights of the variables in Turkey’s monetary conditions index, we used impulse response functions and variance decomposition results of an unrestricted VAR model analyzing the interplay among monetary variables covering the monthly data from Jan-2011 to Dec-2018. Our results reveal that government debt securities have a share in the monetary policy stance and the exchange rate pass-through effect is notable but the impact of the output gap on the inflation is ambiguous in the Turkish economy.