Monetary Policy and Asset Prices in the Period Following the Global Crisis: The Case of Turkey

Abstract

This paper aims at examining whether the Central Bank of the Republic of Turkey (CBRT) reacts to changes in asset prices in the period following the global crisis. To this end, the reaction function of the CBRT is extended with exchange rate gap and stock market index gap. According to the findings of the empirical analysis, the CBRT considers the difference between expected inflation and inflation target and exchange rate gap while it is adjusting interest rates. These findings show that exchange rates have significant effects on the interest rate adjustments of the CBRT beyond affecting inflation expectations in the period following the global crisis.