a b s t r a c tLittle is known about the impact of monetary policy on asset prices in emerging markets. This study applies the heteroscedasticity-based GMM for financial markets in Turkey. The results suggest that event study estimates are biased for some asset returns.
The policy debate in Turkey over the impact of interest rate on inflation concerns the question of what policymakers should do when faced with volatile and high inflation. Motivated by this discussion, we provide an empirical analysis by connecting the cost channel to the Phillips relation. Our findings prove the existence of the cost channel. However, other determinants of inflation —labor share of income, prices of imported inputs, and consumption goods —dominate the cost channel in Turkey.
The last decades proved that policymaking without considering uncertainty is impracticable. In an environment of uncertainty, policymakers have doubts about the policy models they routinely use. This paper focuses specifically on the situation where uncertainty on the financial side of the economy leads to misspecification in the policy model. We describe a coherent strategy for policymakers who are averse to model misspecification and analyze optimal policy design in the face of Knightian uncertainty. To do so, we augment a financial dynamic stochastic general equilibrium model with model misspecification in a simple minimax framework where the central bank plays a zero-sum game versus a hypothetical evil agent. The policy is tailored to insure against the worst-case outcomes. We show that model ambiguity on the financial side requires a passive monetary policy stance. However, if the uncertainty originates from the supply side of the economy, an aggressive response of interest rate is required. We also show the impact of an additional macroprudential tool on the dynamics of the economy.
Macroprudential policies have become essential tools for the policy makers in order to maintain financial stability. Effectiveness of these policies has been studied by a growing literature with an emphasis on the impact of the policies on target variables such as credit growth and asset price appreciations. In this paper, we investigate the impact of macroprudential policies on the current account balance considering the link between external imbalances and financial stability.Building on a standard empirical current account model, we show that usage of an additional macroprudential instrument is associated with an improvement in the current account balance. Moreover, our results indicate that positive impact of macroprudential policy measures on the current account balance is stronger in the deficit countries compared to the surplus countries.
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