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Credit channel and capital flows: a macroprudential policy tool? Evidence from Turkey

  • Serdar Varlik und M. Hakan Berument EMAIL logo
Veröffentlicht/Copyright: 26. August 2015

Abstract

Rapid credit growth induced by sudden capital inflows may negatively affect a country’s economic performance, with the resulting outflows turning into a financial crisis. The purpose of this study is to determine whether controlling the credit channel of monetary policy could be used as a macroprudential tool to suppress the effects of sudden capital inflows on economic performance for small open economies like Turkey. In this paper, using the Vector Autoregression methodology employed by (Bernanke, S. B., M. Gertler, and M. Watson. 1997. “Systematic Monetary Policy and the Effects of Oil Price Shocks.” Brookings Papers on Economic Activity 1: 91–157), we investigate whether shutting down the credit channel helps reduce the effects of capital inflows. Indeed, empirical evidence from Turkey shows that doing so decreases the effects of capital inflows on imports and industrial production, but further decreases interest rate and prices and further appreciates the domestic currency. Therefore, it may be prudent to support credit control with additional policy tools to prevent a further decrease in interest rate and prices and a further appreciation of the domestic currency.

JEL: E51; E52; E58

Corresponding author: M. Hakan Berument, Department of Economics, Bilkent University, 06800, Ankara, Turkey, Phone: +90 312 290 2342, Fax: +90 312 266 2529, e-mail:

Acknowledgments

We would like to thank Rana Nelson and the two anonymous referees for their valuable comments.

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Published Online: 2015-8-26
Published in Print: 2016-1-1

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