Assessing the Effects of a Policy Rate Shock on Market Interest Rates: Interest Rate Pass-Through with a FAVAR Model - The Case of Turkey for the Inflation-Targeting Period

Abstract

The purpose of this paper is to investigate the effectiveness of the central bank's policy rate on market interest rates in Turkey for the inflation-targeting period. Empirical evidence suggests that (i) all interest rates respond to a positive policy rate shock positively for all periods and have a hump shape for government debt security yields as well as for domestic-currency- and foreign-currency-denominated time deposit interest rates; (ii) as maturities increase, the responses of all interest rates to the policy shock increase; (iii) the responses to the policy shock of credit interest rates with higher demand elasticity and longer maturity, such as vehicle and housing rates, is lower than those of others that we consider and (iv) the interest-rate responses of foreign-currency-denominated commercial credits are lower than those of domestic-currency-denominated commercial credits.

Keywords: Interest Rate Pass-Through, Monetary Policy, FAVAR

JEL Classification: E43, E52, E58, E59