Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006)

Abstract

This study aims to test the money base, money supply, credit capacity, industrial production index, interest rates, inflation and real exchange rate data of Turkey during the years 1997 – 2006 through the monetary transmission mechanism and passive money hypothesis using the vector error correction model based causality test. Empirical findings show that the passive money supply hypothesis of the new Keynesian economy is supported in part by accommodationalist views and they do not confirm to the view points of structuralist and liquidity preference theorist. However, according to the monetary transmission mechanism it has been established that long-term money supply only affects general price levels and production is influenced by interest rates in the new economy period for Turkish economy. Empirical findings show that in the new economy period interest transmission mechanism are brought to the fore.Monetary transmission mechanism; money supply endogeneity; Credit; New Keynesian Economy