Perspectives on Monetary Policy and Cost of Capital: Evidence from Turkey

Abstract

Abstract:The target of monetary policy is generally set as to create an environment of manageable employment and affordable long-term interest rates. However, priorities of central banks may differ depending on economic and financial circumstances of individual countries. Modern approaches to monetary policy transmission can be grouped under two headings, Money View and Credit View. The money view concentrates on interest rates to explain the effects of monetary policy on aggregate spending by creating an interest rate channel. The credit channel transmission approach focuses on the supply of credits by banks following a monetary policy shift in interest rates. In 2010, the Central Bank of Turkey (CBT) developed an interest rate corridor shaped by one-week and overnight repo lending to the financial banks to absorb excessive volatility caused by short-term capital inflows. Under this framework, the CBT implements its monetary policy in two ways; firstly it can alter the interest rates of weekly repo as well as O/N lending rate. Secondly, it can configure the funding structure it provides to the financial intermediaries. In such a framework, the interest rate transmission mechanism has been operated by two benchmark interest rates, one of which is the weighted average of the cost of funds provided by the CBT and the other is the interest rate in Borsa Istanbul (BIST) money market transactions at an overnight maturity. There is a strong co-movement between the interest rates and they are affected by the movements in the CBT lending rate in both directions. Interest rates applied to deposits and loans by banks are affected by the policy rate (CBT Average Funding Rate) and the market rate (BIST O/N Repo Rate).

Non-Ricardian Borrowers and Mortgage Type: Implications for Monetary Policy Leaning against the Wind

“…This is also supported by Alpanda and Zubairy (2017) who find that LAW policy is less effective than targeted measures like loan-to-value caps or property taxes. Note that the effectiveness of monetary policy and specifically LAW policy may be determined by other factors: external (Nain and Kamaiah, 2020) or internal (Zuniga and Senbet, 2023). Stein (2013) highlights a key advantage of monetary policy: its ability to permeate all aspects of the financial system, a crucial factor when considering unregulated shadow banking and the potential for regulated banks to shift risks off their balance sheets (Begenau and Landvoigt, 2021).…”

Impact of Monetary Policy Uncertainty on R&D Investment Smoothing Behavior of Pharmaceutical Manufacturing Enterprises: Empirical Research Based on a Threshold Regression Model

“…Second, monetary policy uncertainty increases the difficulty for firms to grasp R&D investment opportunities and reduces their willingness to innovate in R&D [ 36 ], which in turn weakens the motivation for R&D investment smoothing behavior. The cost of funds is an important channel for monetary policy to affect enterprise investment [ 37 ]. Easing or tightening of monetary policy affects the cost of capital of enterprises, which in turn changes the net present value of investment projects calculated based on the cost of capital, and ultimately affects the judgment of enterprises on investment opportunities.…”

Inflation Expectations in Turkey: Determinants and Roles in Missing Inflation Targets

“…A central bank which follows inflation targeting strategy tries to achieve inflation target using all available information and conducts monetary policy by steering short-term (overnight) interest rates. Given the lagged effect of monetary policy on inflation and the high correlation between inflation expectations and inflation (Bofinger, Reischle & Schachter, 2001;Mehra & Herrington, 2008;Mishkin, 2012;Turguttopbas, 2017), a central bank that adopts inflation targeting strategy tries to affect public's inflation expectation. When a central bank is transparent, reliable, and reputable, it is able to shape public's inflation expectation.…”