Effectiveness of Unconventional Monetary Policy Tools on Financial Stability: A NARDL Approach for Turkey

Abstract

The primary purpose of central banks is to achieve and maintain price stability. Until the global financial crisis in 2008, it was accepted that financial stability was achieved in an economy where price stability was achieved. However, after the crisis, it was seen that financial stability could not be achieved in economies where price stability was achieved, and alternative policies began to be sought. In this context, many developed and developing countries have started using unconventional monetary policy tools to ensure financial stability along with price stability. As a result of the expansionary policies implemented by the central banks of developed countries, there has been an intense capital inflow to Turkey, which has led to credit expansion and overvaluation of the domestic currency. Therefore, as of 2011, the Central Bank of the Republic of Turkey (CBRT) started to use non-traditional monetary policy instruments to support financial stability. In this study, a financial stability index has been calculated for the Turkish economy and the effects of interest rate corridor and required reserve implementations on this index were examined with the Non-Linear Auto Regressive Distributed Lag (NARDL) model. According to the results of the analysis, it has been understood that the effects of unconventional monetary policy tools in ensuring financial stability are limited and monetary policy implementations alone are insufficient.