EFFECTS OF INTEREST RATE ON THE MACROECONOMIC VARIABLES UNDER DIFFERENT UNCERTAINTY LEVELS: INTERACTION VECTOR AUTOREGRESSIVE MODEL APPLICATION FOR TURKEY

Ve A. S., Ulke V.

CENTRAL BANK REVIEW, vol.15, no.1, pp.65-93, 2015 (ESCI) identifier

  • Publication Type: Article / Article
  • Volume: 15 Issue: 1
  • Publication Date: 2015
  • Journal Name: CENTRAL BANK REVIEW
  • Journal Indexes: Emerging Sources Citation Index (ESCI), TR DİZİN (ULAKBİM)
  • Page Numbers: pp.65-93
  • Keywords: Interest rate, Inflation uncertainty, IVAR model, INFLATION UNCERTAINTY, MONETARY-POLICY, PRICE UNCERTAINTY, GROWTH, OUTPUT
  • Ankara Haci Bayram Veli University Affiliated: No

Abstract

In this paper, the effectiveness of tight monetary policy on the macroeconomic variables has been analyzed by applying an interactive autoregressive model under different inflation uncertainty levels using the monthly Turkish data spanning 1991: 01 - 2014: 01. Empirical results indicate that an increase in the interest rate decreases the exchange rate, price level and income level. In addition, when we apply the low inflation uncertainty as an interaction term, it is observed that the effectiveness of an increase in the interest rate on the macroeconomic variables becomes more obvious. As a result, it is shown that the tight monetary policy is more efficient when the long-term average inflation rate becomes more stable and short-term volatility decreases.