The Effects of Monetary and Exchange Rate Policy Shocks: Evidence from an Emerging Market Economy
by Yasin Kursat Onder and Mauricio Villamizar-Villegas
Central Bank of Colombia
Many central banks that have opted for monetary autonomy
have also been reluctant to relinquish control over the
value of their currencies. As a result, they have operated
through both interest rate and foreign exchange interventions.
Using daily data from the Central Bank of Turkey during
the period of 2002–10, we study the effects of simultaneous
policies by first purging the intended monetary decisions
from responses to real-time macroeconomic variables and then
determining their impact on economic activity. We find that
the Central Bank of Turkey adjusted its policy rate mostly in
response to inflation levels relative to both the yearly target
and agents’ expectations, and conducted purchases and sales of
foreign currency in response to exchange rate behavior. These
responses varied depending on whether interventions were preannounced.
In terms of effectiveness, we find that unannounced
purchases of foreign currency had a significant effect in reducing
exchange rate volatility but appeared to have no effect on
exchange rate changes. Announced interventions, on the other
hand, did have a significant impact on exchange rate changes
and volatility. Finally, we find that changes in the policy rate
affected inflation and output growth, with a lag delay of four
and two quarters, respectively.
JEL Codes: E43, E52, E58, F31.
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