The Effect of Monetary Policy on Interest Rates in Turkey: A Microstructural Analysis

Abstract

The purpose of this study it to investigate the impact of monetary policy announcements by Central Bank of the Turkish Republic (CBRT) on market interest rates via micro variables on interest rates. In this context, this study investigated the relationship between monetary policy announcements and market interest rates for 2011:01-2015:10 term using GARCH model. The estimates have indicated that monetary policy announcements have different impacts on interest rate volatilities when distinguished as decisions on increasing, decreasing or fixing interest rates. It was found that contractionary monetary policy announcements have different impacts on market interest rates volatilities analyzed in the present study, while expansionary monetary policy announcements decrease the volatility on market interest rates. On the other hand, the announcements towards fixing the monetary policy increases the interest rate volatility of market interest rates. The results of the analysis also indicated that deposit interest rate weighted up to one year are affected the least by the monetary policy changes.