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Examining the effect of credit on monetary policy with Markov regime switching: Evidence from Turkey

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  • İlhan Ali

    (Department of Economics, Faculty of Economics and Administrative Sciences, Tekirdağ Namık Kemal University, 59030, Tekirdağ, Turkey)

Abstract

This paper analyses the effect of credit on monetary policy responses for different regimes in Turkey. To do so, the Taylor rule augmented with the credit gap is estimated by using a Markov regime switching model from January 2006 to December 2019. The empirical findings identify two regimes: the low- and high-interest rate regimes. The prevalence of the former indicates policy authorities’ growth priorities. Furthermore, differing responses across the regimes reflect that the Central Bank of the Republic of Turkey has an asymmetric policy stance. In the low-interest rate regime, the monetary policy only significantly responds to inflation. In the high-interest rate regime, both inflation and credit have significant positive impacts on interest rate setting. This indicates that credit conditions affected the tightening of the monetary policy stance in Turkey despite the use of macroprudential tools after the global financial crisis.

Suggested Citation

  • İlhan Ali, 2022. "Examining the effect of credit on monetary policy with Markov regime switching: Evidence from Turkey," Economics and Business Review, Sciendo, vol. 8(4), pages 68-87, December.
    • Handle: RePEc:vrs:ecobur:v:8:y:2022:i:4:p:68-87:n:6
    DOI: 10.18559/ebr.2022.4.4
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    credit; financial stability; monetary policy; macroprudential policy; Markov regime switching; Turkey;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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