Monetary transmission mechanism in Turkey and Argentina

Abstract

Monetary transmission mechanism, which is used by central banks to affect consumption, investment and saving decisions of both households and firms, has been subject of many theoretical and empirical studies. It seems that there is a consensus that monetary policy affects real economy in the short run. But on the other hand, the question “how it actually does” has been discussed by many economists for several years. The reason for this is that the countries which are at different stages of development also have financial systems at different levels. While in industrialized countries, the capital market system is more effective in the financial system; in developing countries, banking system is dominant in the financial system. From this viewpoint, this study tries to answer the question “which of the two channels of transmission mechanisms is effective in the two developing countries, Argentina and Turkey, “money channel or credit channel (which is not alternative but complementary for money channel)”. VAR model is used to identify relative strengths of different monetary transmission channels in each country by five macroeconomic variables which are stated in the following order: overnight rate, bank deposits, bank loans, consumer price index and industrial production index. The data period of these variables ranges from 2003:01 to 2010:08. The paper proceeds as follows: Section I provides theoretical background of the money and credit channels of transmission mechanism. Section II summarizes recent empirical studies. Section III describes variables and discusses the empirical findings of the model. Section IV provides concluding remarks.