Rethinking interest rate volatility as a macroprudential policy tool

Date

2016

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Abstract

Along with most other central banks, Turkey’s central bank has implemented unconventional policies since the 2007/2008 financial crisis. Financial stability has been one of the targets of these macroprudential policies. However, since Turkey is working toward this goal without increasing its inflation rate, tracking only short-term interest rates to measure this policy’s effectiveness would be inefficient. In this paper, we provide empirical evidence from Turkey that interbank interest rate volatility can be an additional tool for monetary policy makers to help achieve the goal of financial stability. Impulse responses generated from the Vector Autoregressive models indicate that interest rate volatility increases interest rates, depreciates domestic currency and decreases credit growth and output. Its statistically insignificant effect on prices is open to interpretation.

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Middle East Development Journal

Publisher

Routledge

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Published Version (Please cite this version)

Language

English