Identification of Monetary Policy Shocks in Turkey: A Structural VAR Approach

This paper tries to identify the monetary policy shocks in Turkey during the explicit inflation targeting period starting from 2006 using a structural VAR approach. We model Turkey as a small open economy where domestic variables are affected by external factors like commodity prices and global demand but domestic variables do not affect external variables. We analyze the effects of four shocks on Turkish economy: two domestic shocks of interest rates and risk premium, and two external shocks of commodity prices and global demand. All shocks are found to have significant effects on main economic variables. Positive interest rate shocks appreciate the domestic currency and decrease the inflation whereas positive risk premium shocks cause a depreciation and an increase in inflation. Both of these shocks also cause a decrease in the domestic activity. Being an open and internationally integrated economy, Turkey is significantly affected by global shocks. A positive global demand innovation leads to an increase in global commodity prices, which together increase both the level of prices and economic activity in Turkey. Positive commodity price shocks also increase the inflation in Turkey.