Responses of the term structure of interest rates and asset prices to monetary policy shocks: Evidence from Turkey

Abstract

This paper investigates the impact of the policy decisions by the Central Bank of the Republic of Turkey (CBRT) and Federal Reserve (Fed) on the asset prices and the term structure of interest rates in Turkey between 2010 and 2016 using Vector Autoregression (VAR) framework, heteroscedasticity based identification (HBI) and daily data. What is particular about this period is that the CBRT added financial stability to its objectives in addition to price stability and adopted a new monetary policy mix that entailed the joint use of multiple policy tools. For identification, we rely on the assumption that monetary policy shocks are heteroscedastic. Our results show that expansionary monetary policy shocks by the CBRT made the yield curve steeper in the sample period which implies that focusing on multiple objectives weakened the control of the CBRT over the long-term interest rates.