Examining the Impact of Monetary Policy in Turkey: TVP-VAR with Stochastic Volatility

Abstract

This study aimed to examine the time-varying effects of monetary policy on macroeconomic variables, addressing the price puzzle problem in Turkey from 1994 and 2020 by using a time-varying parameter vector autoregression with a stochastic volatility model. The spread between long-term and short-term interest rates served as a measure of monetary policy. The empirical evidence indicated that positive innovations in the spread decrease inflation, economic activity, total credit, and the exchange rate. Moreover, it was determined that the responses to monetary policy shocks have changed over time. The responses to positive innovations in the spread increased in absolute value after 2017, suggesting that the effects of monetary policies implemented after this period on the economy have intensified. These findings underscore the need to employ a time-varying model alongside dynamic monetary policy measures to ascertain the changing effects of policy interventions. Therefore, Turkish policymakers should consider the increasing sensitivity of the economy to monetary policy actions when designing future interventions, particularly for managing inflation and stabilizing economic activity.

JEL: C11; C32; E52