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The Role of Capital Flows in the International Transmission of US Monetary Policy: The Case of Turkey

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  • Nuri Çağrı Akar
  • Cemil Varlık

Abstract

This article aims to examine the impacts of US monetary policy (MP) changes on the Turkish economy. A Structural Vector Autoregressive (SVAR) model is estimated for the period 2002:01–2017:12, during which a flexible exchange rate regime was adopted in the Turkish economy. According to the impulse-response analysis, the Turkish interest rate responds positively and significantly to the US Effective Federal Funds Rate (EFFR). This result shows that the Central Bank of the Republic of Turkey’s (CBRT) MP follows the FED's MP, consistent with the dilemma hypothesis of Rey (2015). The analysis also demonstrates that both the EFFR and the VIX have a negative impact on net total capital inflows to the Turkish economy. The impulse-responses for the three components of net capital inflows indicate important conclusions. Firstly, neither EFFR nor VIX has a significant impact on Net Foreign Direct Investment (NFDI) inflows. Secondly, Net Portfolio Investments (NPI) respond significantly to the VIX but not to the EFFR. Thirdly, Net Other Investments (NOI) respond significantly to the EFFR but not to the VIX. These findings indicate that the NOI component plays a direct and major role in the emergence of the US MP’s spillover effects on the Turkish MP.

Suggested Citation

  • Nuri Çağrı Akar & Cemil Varlık, 2025. "The Role of Capital Flows in the International Transmission of US Monetary Policy: The Case of Turkey," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 10(2), pages 502-528.
    • Handle: RePEc:ahs:journl:v:10:y:2025:i:2:p:502-528
    DOI: 10.30784/epfad.1579707
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    References listed on IDEAS

    as
    1. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    2. Herwartz, Helmut & Roestel, Jan, 2017. "Mundell’s trilemma: Policy trade-offs within the middle ground," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 1-13.
    3. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    4. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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    Keywords

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    JEL classification:

    • 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
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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