The CBRT’s Monetary Policy Transmission Mechanism: Evidence from Real Interest Rate Dynamics in Turkiye

Abstract

This study examines the effectiveness of the monetary transmission mechanism in Turkiye by analyzing the short and long-run relationships between real interest rates and selected macroeconomic variables. Using quarterly data covering 1998Q1–2024Q4, the study estimates an ARDL error-correction model incorporating inflation, real effective exchange rate growth, industrial production growth, BIST100 performance, GDP growth, and M1 money supply growth. The Supremum Wald test identifies a structural break in 2009Q2, which is controlled for through a structural-break dummy. The bounds test provides strong evidence of a long-run cointegrating relationship among the variables. The negative and statistically significant adjustment coefficient (?0.1576) indicates that approximately 15.76% of the previous quarter’s disequilibrium is corrected in each subsequent quarter. The long-run results show that inflation and industrial production growth have positive and statistically significant coefficients, whereas real effective exchange rate growth, GDP growth, and M1 money supply growth have negative and statistically significant coefficients. The BIST100 coefficient is statistically insignificant. In the short run, inflation and industrial production growth have negative coefficients, while M1 money supply growth has a positive coefficient. Diagnostic tests provide no statistically significant evidence of heteroskedasticity or first-order serial correlation. After controlling for the 2009Q2 structural break, the CUSUM and CUSUMSQ results indicate parameter stability. The findings emphasize the importance of price stability, effective liquidity management, productive capacity, and predictable monetary policy communication in strengthening monetary transmission in Turkiye.