January 2018 issue contents
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.

Full article (PDF, 41 pages, 4173 kb)