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Ekonomi, Politika & Finans Araştırmaları Dergisi, 2024, 9(2): 287-305
Journal of Research in Economics, Politics & Finance, 2024, 9(2): 287-305
Araştırma Makalesi / Research Article, https://doi.org/10.30784/epfad.1407576
287
INTEREST RATE PASS-THROUGH IN TÜRKİYE:
EVIDENCE OF THE MONETARY POLICY APPROACH
Türkiye'de Faiz Oranı Geçişkenliği: Para Politikası Yaklaşımından Kanıtlar
Nurcihan AKŞEHİRLİ
*
Keywords:
Interest Rate Pass-
Through,
Türkiye,
ARDL,
NARDL
JEL Codes:
E40, E50, C22
Abstract
Central banks direct banks' rates by increasing or decreasing policy rates
through the interest rate channel. The effectiveness of this channel is related
to the interest rate pass-through. The pass-through of interest rates indicates
the impact of changes in policy rates on the retail rates of banks. Pass-through
is not only a prerequisite for the monetary transmission mechanism but also is
the first stage of it. A complete and quick pass-through increases the
effectiveness of the interest rate channel. This paper focuses on the monetary
policy approach and uses the ARDL and NARDL models to analyze the
relationship between the policy rate and the lending rate in order to test the
interest rate pass-through for Türkiye. To enable a comparison of the degree
of pass-through and the speed of adjustment, this paper focuses on two time
periods: 2011:01–2016:12 and 2017:01–2023:10. The findings of the paper
indicate that there are three shreds of evidence for the interest rate pass-through
in Türkiye. It is symmetric for both periods. The level of pass-through in the
initial period exceeds that of the subsequent period. The rate of adjustment in
the second period is faster than in the first one.
Anahtar Kelimeler:
Faiz Oranı
Geçişkenliği,
Türkiye,
ARDL,
NARDL
JEL Kodları:
E40, E50, C22
Öz
Merkez bankaları, faiz kanalı yoluyla politika faizlerini artırarak veya
azaltarak bankaların faiz oranlarını yönlendirmektedir. Faiz kanalının
etkinliği, faiz geçişkenliğine bağlı bulunmaktadır. Banka faiz oranlarının
politika faiz oranlarındaki değişikliklere verdiği tepkiyi gösteren faiz
geçişkenliği, parasal aktarım mekanizmasının sadece önkoşulunu değil, aynı
zamanda ilk aşamasını oluşturmaktadır. Geçişkenliğin tam ve hızlı olması ise
faiz kanalının etkinliğini artırmaktadır. Türkiye'de faiz geçişkenliğini, para
politikası yaklaşımı çerçevesinde test eden bu çalışma, ARDL ve NARDL
modellerini kullanarak politika faiz oranı ile kredi faiz oranı arasındaki ilişkiye
odaklanmaktadır. Çalışma, faiz geçişkenliğinin derecesini ve ayarlanma hızını
karşılaştırabilmek için iki dönemi (2011:01-2016:12 ve 2017:01-2023:10)
esas almaktadır. Çalışmanın sonuçları, üç kanıtı ortaya koymaktadır.
Türkiye'de faiz geçişkenliği her iki dönem için de simetriktir. Birinci
dönemdeki geçişkenlik derecesi ikinci döneme göre daha yüksektir.
Geçişkenliğin ayarlama hızı, ikinci dönemde, birinci döneme göre daha
hızlıdır.
*
Dr., Independent Researcher, Türkiye, naksehirli70@gmail.com
Received Date (Makale Geliş Tarihi): 20.12.2023 Accepted Date (Makale Kabul Tarihi): 20.05.2024
This article is licensed under Creative Commons Attribution 4.0 International License.
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
288
1. Introduction
The monetary policy transmission mechanism is the process by which monetary policy
decisions affect the economy and the price level through various channels. The interest rate
channel, also known as the traditional Keynesian interest rate channel, is one of the channels of
the transmission mechanism. As the central bank has the power to issue money, it also has the
authority to set short-term nominal interest rates, such as policy rates. The change in the short-
run nominal policy rates affects the long-run real money market rate and long-run real banks' rates
(lending and deposit rates). The savings and investment decisions of firms and households are
impacted by changes in deposit and lending rates. For instance, borrowing money for investment
and consumption becomes more attractive when lending rates are lower. The amount of
investment and consumption influences the aggregate demand and total output. When everything
else is equal, increased investment and consumption lead to an increase in demand and output
(CBRT, 2013: 5; ECB, 2024). Two stages exist in the interest rate channel: the pass-through from
short-run nominal rates to long-run real rates, followed by the transmission of real rates to
aggregate demand and production (Égert and MacDonald, 2008: 8).
Interest rate pass-through is the process by which the policy rate affects the other rates. It
shows the speed and degree of the effect of policy rates on market rates and retail bank rates (Tai
et al., 2012: 164). Interest rate pass-through is delineated through three distinct approaches within
the existing literature: the "Monetary Policy Approach," the "Cost of Funds Approach," and the
"Unifying Approach."(see Figure 1.).
Figure 1. The Approaches Explaining Interest Rate Pass-Through
Source: Égert and MacDonald (2008).
The Monetary Policy Approach ( ) deals with the effect of monetary policy on
bank's rates and does not include any other explanatory variables. This approach focuses only on
the pass-through from the policy rates to the bank's retail rates (Samba and Yan, 2010: 32). It is
Monetary Policy Rate
(
Long Term Market Rates
(
Bank Retail Rates
(Lending & Deposit
Rates) (
FIRST
STAGE
SECOND
STAGE
Monetary Policy
Approach
Cost of Funds
Approach
Unifying Approach
(First Stage & Second Stage)
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possible to look directly at the pass-through between policy rates and the bank's rates under the
assumption of a stable yield curve. This assumption allows us to test the pass-through by taking
a shortcut (Crespo-Cuaresma et al., 2006: 91).
The Cost of Funds Approach ( ) comprises the second stage of the pass-through
(Doojav and Kalirajan, 2016: 277). This approach is supported by the marginal cost pricing model
developed by Rousseas (1985) and De Bondt (2005). The Cost of Funds Approach focuses on the
decision of setting prices of the banks while revealing the impact of changes in market rates on
deposit and lending rates. The cost of funds refers to two meanings for the banks in terms of
deposits and loans. While the cost of funds indicates the financing costs for deposits, it indicates
the opportunity costs for loans (Samba and Yan, 2010: 32). Short-run money market rates may
directly affect long-run market rates according to this approach (Doojav and Kalirajan, 2016:
277).
The Unifying Approach [( ) & ( )] includes two stages. While the policy
rate is transmitted to market rates in the first stage, there is a pass-through from market rates to
bank's retail rates in the second stage as may be seen in Figure 1 (Égert and MacDonald, 2008:
10).
The speed and degree of pass-through may be influenced by many factors sorted as follows:
macroeconomic conditions, monetary policy operations and the structure of the financial system.
Macroeconomic Conditions: Rapid economic growth has a positive impact on pass-
through, however economic contraction has a negative impact. An increase in uncertainty in the
economy negatively affects expectations and thus slows down the pass-through. High levels of
public debt affect the pass-through negatively (Cavusoglu, 2010: 31-32).
Monetary Policy Operations: Expected and unexpected changes in the policy rates may
affect the pass-through variously. Banks are adept at adapting to anticipated changes, but they are
less agile when it comes to unforeseen changes. The speed and degree of pass-through also vary
depending on whether the change of policy rate is permanent or temporary. Banks just want to
adapt to permanent changes due to the adjustment costs (Bredin et al., 2002: 225-226).
Structure of the Financial System: The pass-through may be affected by various factors
within the framework of the structure of the financial system, such as competition/concentration,
asymmetric information, and adjustment costs. If competition is low in the banking market, banks
may trade with high-profit margins and may adapt slowly and incompletely to changes in policy
rates. The competition among banks is measured by the concentration. If the concentration of
the banking market is high, competition among the banks decreases, and thus interest rate pass-
through weakens, slows down, and becomes asymmetric (Égert and MacDonald, 2008: 10).
Asymmetric information affects the pass-through negatively because the expansion of the cost of
asymmetric information increases the funding costs for banks. Banks transmit this increase to
their customers by increasing the lending rates. An increase in lending rates may lead to two
problems: Adverse Selection and Moral Hazard. If banks increase the lending rates, they may
have to choose high-risk and dishonest customers (Adverse Selection) or investors may invest in
risky projects (Moral Hazard). Since these problems may increase the credit risk of banks, the
expected return of banks may decrease. In this situation, banks adjust lending rates below market
rates and ration loan supply.However, credit rationing causes upward rigidity for lending rates.
On the other hand, if banks do not ration the supply of credit, upward rigidity may not be valid
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
290
for lending rates. It can be assumed that banks lend to two classes of borrowers: riskless borrowers
and risky borrowers. Adverse selection and moral hazard cause an increase in lending rates for
risky borrowers. In such a situation, transmission from policy rate to lending rates is complete for
the riskless borrowers. However, for risky loans, banks need to increase the lending rates by a
rate higher than the increase of policy rate to compensate for the probability of default (De Bondt,
2002: 8-10). If policy interest rates change too often, banks do not want to change interest rates
often due to adjustment costs. In such economic conditions, banks prefer to change other elements
of lending or deposit agreements instead of changing interest rates (Cavusoglu, 2010: 31-46).
In short, such conditions as follows support fast and symmetric pass-through: complete and
symmetric information, high competition, suitable macroeconomic conditions, expected and
permanent changes in the policy rates. If these conditions do not exist in the banking market and
the economy as a whole, the policy rate may not adjust to the banks' rates in the same direction
and at the same level. In such a situation defined as asymmetric pass-through, the bank's rates
may be sticky for upward or downward changes in the policy rate (Uslu and Karahan, 2016: 672).
The level of pass-through is so important for the success of monetary policies. An incomplete,
asymmetric and slow pass-through may cause a failure of monetary policy and may affect
negatively the decisions of economic units about investment, savings, and consumption. On the
other hand, if the long-run pass-through is high, fast, and complete, the interest rate channel is
effective. A fast, symmetrical and complete pass-through creates an efficient, and well-
functioning financial system (Tai et al., 2012: 163-164).
The Central Bank of the Republic of Türkiye (CBRT) had implemented a monetary policy
that included a single target (price stability) and a single instrument (short-run rates) until 2010.
As the 2008 Global Crisis made it clear that financial stability should not be ignored, the CBRT
turned to unconventional monetary policies. The CBRT adopted multiple targets, such as keeping
credit volume at reasonable levels and preventing exchange rate volatility (financial stability), in
addition to price stability (CBRT, 2024). Since short-run interest rates were not sufficient to
achieve these targets, the CBRT started to use additional instruments such as the interest rate
corridor, reserve requirements, liquidity management, reserve option mechanism, and the 1-week
repo rate to diversify its instruments. For managing liquidity, the CBRT used the 1-week repo
rate and the overnight lending rate, which is the upper band of the interest rate corridor, to fund
the market. The using of these rates led to the emergence of a new concept known as the weighted
average funding cost. The weighted average funding cost represents monetary policy and is
expected to play an effective role in the monetary transmission mechanism (Buberkoku and
Kizilder, 2019: 219-220).
Based on this, interest rate pass-through is an important research topic in terms of
demonstrating the success or failure of monetary policy. The present study tests the pass-through
in Türkiye within the framework of the Monetary Policy Approach by using Autoregressive
Distributed Lag (ARDL) and Nonlinear ARDL (NARDL) models for two periods (2011:01-
2016:12 and 2017:01-2023:10). Testing two periods and comparing the results of these periods
with ARDL and NARDL models make this study different from other studies that analyze
Türkiye. The weighted average funding cost is preferred as an independent variable. It is also
preferable to use the commercial loan interest rate as a dependent variable since bank loans are
crucial for both price stability and financial stability. This study tries to find answers to two
questions: 1. Is there a one-to-one pass-through for Türkiye? If there is not, what can be said about
the degree and speed of it? Is it complete or incomplete? Is it fast or slow? Is the pass-through
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symmetric or asymmetric? 2. What are the differences/similarities between the empirical results
of the first period and the second period? The study consists of three parts following the
introduction section each aimed at answering specific questions. The second section provides the
literature review while the third section introduces the model, dataset and methodology. Empirical
findings are presented in the fourth section. The conclusion includes policy recommendations for
complete and efficient pass-through.
2. Literature Review
The studies test interest rate pass-through are divided into three groups. The studies in the
first group perform the analysis with a monetary policy approach, while those in the second group
are based on the cost of fund approach. The studies in the last group are tested with the unifying
approach. Although the pass-through between the policy rate and money market rate is mostly
complete or close to complete according to the results of the studies, the pass-through from the
policy rate/the money market rate to the bank's retail rates is usually incomplete. Empirical studies
often test a single country, but it is also common to analyze multiple countries. The interest rate
pass-through is an important topic for Türkiye as well as for all other countries. Just two of the
studies evaluating Türkiye apply the ARDL model. Both studies are based on a single period. No
study applying the NARDL model has tested Türkiye. The ARDL and NARDL models are
applied in this study to examine the interest rate pass-through over two periods to see if there are
any differences. This study differs from other research on Türkiye due to this circumstance. Table
1 provides a review of the empirical literature.
Table 1. Related Studies
Author
Country
Period
Variables
Method
Result
Bredin et al.
(2002)
Ireland
1980:01-
2001:03
Money Market
Rate (MMR),
Lending Rate
(LR)(Mortgage,
Consumer,
Firm), Prime
Rate
Johansen
Cointegration
Test, Error
Correction
Model (ECM)
Pass-through from MMR
to LR is not complete.
The highest speed of
adjustment is valid for
prime rates.
De Bondt
(2002)
Euro Area
1996:01-
2001:05
MMR,
Government
Bond Yield
(GBY), Deposit
Rate (DR), LR
Vector
Autoregressive
(VAR), Impulse
Response, ECM
Pass-through within one
month from MMR to
LR/DR is incomplete.
Pass-through of LR is
almost complete for the
long run.
Sander and
Kleimeier
(2003)
Euro Area
1993:01-
2002:10
O/N MMR,
Interbank Rate,
GBY, LR, DR
VAR, Threshold
Autoregressive
(TAR)
Pass-through is high for
the monetary policy rate.
Crespo-
Cuaresma et
al. (2004)
Czech
Republic,
Hungary,
Poland
1994:01-
2002:12
Interbank
MMR, GBY,
LR, DR
ARDL
Although the pass-through
is complete for Poland, it
is incomplete for the
Czech Republic and
Hungary.
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
292
Table 1. Continued
Horváth et al.
(2004)
Hungary
1997:01-
2004:04
2001:05-
2004:04
MMR, LR (Hausehold and
Corporate) DR
ECM, TAR, Panel
Regression
Pass-through from MMR to corporate rate is complete and
quick. The adjustment of DR and household rates is incomplete
and sluggish.
Amarasekara
(2005)
Sri Lanka
1996:06-
2004:12
Repo & Reverse Repo Rates,
Open Market Operation (OMO)
Rates, Call MMR, LR, DR
Granger Causality
Test, Simple Linear
Regressions, Engle
Granger (EG) and
Johansen
Cointegration Tests,
ECM
Pass-through from PR to call MMR is almost complete. Pass-
through from call MMR to LR and DR is sluggish and
incomplete except for the prime rates. Commercial bank's rates
adapt symmetrically.
Humala (2005)
Argentina
1993:06-
2000:12
MMR, LR (Overdrafts, Bills,
Personal Loans)
EG and Johansen
Cointegration Test,
VAR/VECM,
Markov Switching
(MS) VAR/VECM
There is a high stickiness for high-risk loans.
Kwapil and
Scharler (2006)
Euro Area
and
United
States
1995:01-
2003:09
MMR, LR (Hausehold,
Mortgage, Business), DR
ARDL
Pass-through is less complete in the Euro Area than in the U.S.
for DR and LR.
Sørensen and
Werner (2006)
Euro Area
1999:01-
2004:06
PR, LR (Corparate, Consumer,
Mortgage), DR (Current
Account, Time)
Pedroni
Cointegration Test,
ECM
Pass-through is the highest for mortgages and lowest for current
account deposits.
Aydin (2007)
Türkiye
2001:06-
2005:09
MMR, LR (Vehicle, Corporate,
Consumer, Mortgages)
Westerlund
Cointegration Test,
Hausman Test
Pass-through of household loans is higher compared to
corporate loans.
Von Borstel
(2008)
Germany,
Euro Area
2003:01-
2007:09
MMR, LR (Household,
Overdraft, Consumer, Hausing,
Corparate), DR (Time, Savings)
VAR, Johansen
Cointegration Test,
VECM
Although pass-through from MMR to time DR, corporate rates
and housing rates is fast, it is sluggish for the consumer rate
and saving DR.
Maskay and
Pandit (2010)
Nepal
1990:Q1-
2009:Q4
PR, DR, LR, Saving Rate
EG and Johansen
Cointegration Tests,
ECM
PR is ineffective for the retail rates.
Cavusoglu
(2010)
Türkiye
2002:01-
2009:12
PR, LR (Vehicle, Commercial,
Consumer, SME, Mortgages),
DR
VAR, ECM
Although the degree of pass-through is high for LR, the speed
of adjustment is high for DR. Pass-through of consumer loans
is higher and faster compared to commercial loans.
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Table 1. Continued
Belke et al.
(2012)
European
Monetary
Union 12
Countries
2003:01-
2011:09
MMR, LR
ARDL, Johansen
Cointegration Test
Pass-through is incomplete.
Hanif and Khan
(2012)
Pakistan
2001:07-
2011:08
PR, MMR, DR, LR
ARDL
Pass-through from PR to MMR is swift. Pass-through from
MMR to DR is sluggish and incomplete. LRs are more
sensitive to changes in MMR compared to the DR.
Tai et al. (2012)
6 Asian
Countries
1988:01-
1997:06
MMR, DR, LR
Generalized Least
Square (GLS), Ordinary
Least Squares (OLS)
Pass-through from MMR to DR/LR is slow and sluggish.
Sahin et al.
(2013)
Türkiye
2002:01-
2012:08
PR, LR (Vehicle, Commercial,
Consumer, Mortgages)
VAR, Variance
Decomposition,
Impulse Response,
Granger Causality Test
Pass-through from PR to LR is incomplete.
Yuksel and
Metin Ozcan
(2013)
Türkiye
2001:12-
2011:04
PR, LR (Cash, Vehicle, Housing,
Commercial)
TAR, Momentum TAR
(MTAR)
Pass-through is symmetric, complete and significant.
Doojav and
Kalirajan (2016)
Mongolia
2002:12-
2015:09
MMR, LR, DR
ARDL, NARDL
Pass-through of the DR is higher than LR. Adjustment of
DR is slower compared to LR. Although the pass-through
is negatively asymmetric for LR, it is positively asymmetric
for DR.
Uslu and
Karahan (2016)
Türkiye
2002:01-
2014:12
BIST Interbank O/N Rate, LR
(Vehicle, Commercial, Consumer,
Mortgages)
ARDL, Kalman Filter
The highest pass-through is valid for consumer loans.
Grigoli and
Mota (2017)
Dominica
n
Republic
2006:06-
2015:06
PR, DR, LR (Commercial,
Mortgage, Consumer)
ARDL, TAR, MTAR
Pass-through of LR is faster compared to DR. Adjustments
of short-run rates are asymmetric.
Ugur and
Bingol (2018)
Türkiye
2002:01-
2016:12
PR, LR (Vehicle, Commercial,
Consumer, Mortgages)
Toda Yamamota and
Frequency Domain
Causality Tests
There is a causality from PR to LRs except for vehicle rate.
Buberkoku and
Kizilder (2019)
Türkiye
2011:01-
2017:09
The CBRT Average Funding Cost
(AFC), BIST Interbank O/N Rate,
DR, LR (Vehicle, Commercial,
Consumer, Mortgages),
Gregory-Hansen
Cointegration Tests
CBRT AFC is more influential than BIST Interbank O/N
Rate on LR and DR.
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
294
Table 1. Continued
Sahin (2019)
Türkiye
2002:01-
2018:04
The CBRT AFC, O/N Simple
Rate, LR (Personal, Vehicle,
Commercial, Consumer, Housing),
DR
EG and Johansen
Cointegration Test,
VECM, Nonlinear
VECM
Pass-through of DR is higher compared to LR. There is a
symmetric relationship and correct transmission for all
variables.
Bulut (2020)
Türkiye
2011:01-
2019:06
BIST Interbank O/N Rate, LR
(Consumer, Commercial)
Gregory-Hansen and
Tsong Cointegration
Tests
Pass-through is almost complete.
Guler (2021)
Türkiye
2013:01-
2018:11
CBRT O/N Lending, One Week
Repo Rates, CBRT AFC and BIST
Interbank O/N Rate, LR, DR
GMM
LR and DR are more sensitive to CBRT AFC and BIST
Interbank O/N Rate
Salihoglu and
Hepsag (2021)
Türkiye
2011:01
01-
2021:22
01
CBRT AFC, BIST Interbank O/N
Rate, LR, DR
Residual Augmented
Least Squares (RALS)
The Pass-through from BIST Interbank O/N rate to LR and
DR is higher than the pass-through of CBRT AFC.
Ozsoy Calis et
al. (2022)
Türkiye
2020-
2021
weekly
data
BIST O/N Repo Rate, LR
(Vehicle, Commercial, Consumer,
Mortgages)
Granger Causality Test
There is a causality relationship only between the BIST
O/N Repo rate and vehicle loans.
Gunes (2022)
Türkiye
2012:06
01-
2022:28
01
The CBRT AFC, LR (Vehicle,
Commercial, Consumer,
Mortgages), DR
VAR, Variance
Decomposition,
Impulse Response
Pass-through of DR is higher compared to LR.
Jorayev and
Yildiz (2022)
Türkiye
2010:05-
2021:03
PR, LR (Commercial), DR
ARDL
LR and DR adapt to changes in the PR slowly.
Ojaghlou and
Kaya Soztanaci
(2022)
Türkiye
2002:01-
2021:03
CBRT Discount Rate, LR, DR,
MMR, Treasury Bill Rate, GBY
Bayesian VAR
Pass-through between the CBRT discount rate and LR is
complete.
Oyadeyi (2022)
Nigeria
2006:12-
2020:12
PR, MMR, DR, LR
Mean Adjustment Lag,
ECT
Although short run pass-through from PR to MMR is
incomplete, the long run process over-shoots. Pass-through
from MMR to LR and DR is weak and incomplete.
Herlambang et
al. (2023)
Indonesia
1990:03-
2017:02
MMR, LR
NARDL
There is an upward rigidity in the overall period.
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3. Dataset, Model and Methodology
This study analyzes the interest rate pass-through for Türkiye with a monthly dataset and
two periods (2011:01-2016:12 and 2017:01-2023:10). The analysis started with 2011:01 because
the dataset of the independent variable was accessible by this year and month. The analysis was
based on two periods to understand the pass-through better because the policy rate was relatively
stable in the first period of the analysis, while fluctuation increased in the second period (see
Figure 2). This situation may differentiate the degree and speed of pass-through. Therefore, it is
useful to test these periods separately to prove the difference. Additionally, comparing two
periods allows for an analysis of their symmetry/asymmetry, degree, and speed.
Figure 2. The Weighted Average Funding Cost of the CBRT
Since the policy rate may affect both the money market rate and bank's retail rate, this study
prefers to look at the pass-through using a shortcut. Thus, the study focuses on the Monetary
Policy Approach. This study represents the policy rate using the weighted average funding cost
(WACF) of the CBRT as an independent variable similar to Buberkoku and Kizilder (2019), Sahin
(2019), Guler (2021), Salihoglu and Hepsag (2021), and Gunes (2022). This study also adds the
weighted average interest rate of banks' commercial loans (IRCL) as a dependent variable to
represent the lending rate, or bank retail rate, similar to other studies such as Cavusoglu (2010),
Sahin et al. (2013), Yuksel and Metin Ozcan (2013), Uslu and Karahan (2016), Grigoli and Mota
(2017), Ugur and Bingol (2018), Buberkoku and Kizilder (2019), Sahin (2019), Bulut (2020),
Ozsoy Calis et al. (2022), Gunes (2022), Jorayev and Yildiz (2022). The CBRT Electronic Data
Delivery System is the source of the dataset (CBRT, 2023).
Equation (1) shows the model that tests the interest rate pass-through of Türkiye. The
degree of the pass-through is indicated by. The Monetary Policy Approach states that
should theoretically have a positive sign.
=
(1)
→ There is a complete, strong and symmetrical pass-through. The condition of
commercial loan market is competitive.
0
5
10
15
20
25
30
35
2011-01
2011-06
2011-11
2012-04
2012-09
2013-02
2013-07
2013-12
2014-05
2014-10
2015-03
2015-08
2016-01
2016-06
2016-11
2017-04
2017-09
2018-02
2018-07
2018-12
2019-05
2019-10
2020-03
2020-08
2021-01
2021-06
2021-11
2022-04
2022-09
2023-02
2023-07
WACF
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
296
→ There is an incomplete and weak pass-through. The condition of commercial
loan market is non-competitive. Weak competition may indicate that banks have some degree of
market power. The other factor that can explain the incomplete pass-through is asymmetric
information. If banks ration the amount of credit supply due to the asymmetric information,
may take on a value less than 1. There are many factors that may cause incomplete pass-through
except market power and asymmetric information. These factors are given as follows: economic
contraction, an increase in uncertainty, a high level of public debt, temporary and unexpected
changes in policy interest rates, and adjustment costs.
→ If banks do not ration the supply of credit against asymmetric information
problems and they prefer to increase lending rates, may take on the value higher than 1 (De
Bondt, 2002: 8-10; Bulut, 2020: 20; Salihoglu and Hepsag, 2021: 46).
This study analyses the interest rate pass-through by applying ARDL and NARDL models.
The ARDL model developed by Pesaran et al. (2001) has a better performance in testing for
cointegration in small samples. Time series do not need to be cointegrated in the same order,
unlike other traditional cointegration tests. In other words, the ARDL model makes it possible to
test for cointegration with I(0) and I(1) variables. However, any variable should not definitely be
I(2) (Doojav and Kalirajan, 2016: 277).
Firstly, cointegration between the variables is tested with the ARDL Bound Test and
Equation 2 is estimated.
∆t=α0+t-1 t-1
p
i=1
∆t-i+1
p
i=0
∆t-i+εt
(2)
It is necessary to determine the suitable lag length using Information Criterion such as
Akaike (AIC), Schwarz (SC) or Hannan-Quinn (HQ) based on the VAR model for the estimation.
ARDL model in Equation 3 is used for the estimation of long-run coefficients.
t = 0 + 1
p
i=1 t-i +
q
i=0 t-i+
(3)
Error Correct Model (ECM) based on the ARDL is presented in Equation 4, and it is used
to test short-run effects. ECt-1 refers to adaptation for long-run. The coefficient of ECt-1is expected
to be statistically significant and negative.
∆t= 0 +1
p
i=1
∆t-i+
q
i=0
∆t-i+(ECt-1+εt
(4)
The NARDL model developed by Shin et al. (2013) has the same advantage as the ARDL
model in capturing any cointegrating relation (Herlambang et al., 2023: 5). The NARDL model
also allows to determine the nonlinear cointegration, linear cointegration or absence of
cointegration (Doojav and Kalirajan, 2016: 277). Asymmetric cointegrating regression in
Equation 5 is used for testing pass-through.
=
(5)
and represent long-run parameters. The partial sum processes of positive and
negative changes in the WACF are separated as shown in Equation 6 and Equations 7.
Ekonomi, Politika & Finans Araştırmaları Dergisi, 2024, 9(2): 287-305
Journal of Research in Economics, Politics & Finance, 2024, 9(2): 287-305
297
(6)
(7)
Equation 5 is indicated in the asymmetric EC form in Equation 8.
(8)
The asymmetric long-run relationship is tested with based on Equation
8. If there is a long-run relationship, it is tested whether the asymmetric long-run parameters
() are equal to each other. The asymmetric short-run relationship is tested
in two ways: strong and weak form. The equality between the positive and negative short- run
parameters that in the same lag length (
) is tested with the Wald Test in order to
determine the strong asymmetry. The equality between the sum of positive short-run parameters
and the sum of negative short-run parameters (
) is tested with the Wald Test
for determining the weak asymmetry (Malik et al., 2020: 8; Icen, 2021: 9-11).
4. Empirical Results
4.1. Results of First Period: (2011:01-2016:12)
This study applied the Dickey-Fuller Unit Root Test (DF), Augmented Dickey-Fuller Unit
Root Test (ADF), and Philips-Perron Unit Root Test (PP) to check the stationarity of the series
(Dickey and Fuller, 1979; Dickey and Fuller, 1981; Phillips and Perron, 1988). The empirical
results in Table 2 show that dependent and independent variables were I(1). Since none of the
series were I(2), the study applied the ARDL and NARDL models.
Table 2. Unit Root Tests: (2011:01-2016:12)
Variable
DF
ADF
PP
Status
Intercept
Intercept
and Trend
Intercept
Intercept
and Trend
Intercept
Intercept
and Trend
IRCL
(-1.26)
(-2.62)
(-2.88)
[0.05]**
(-3.09)
[0.12]
(-2.41)
[0.14]
(-2.34)
[0.41]
I(1)
ΔIRCL
(-5.41)*
(-5.47)*
(-5.39)
[0.00]*
(-5.40)
[0.00]*
(-5.15)
[0.00]*
(-5.15)
[0.00]*
WACF
(-1.84)***
(-2.50)
(-2.23)
[0.20]
(-2.47)
[0.34]
(-2.34)
[0.16]
(2.63)
[0.27]
I(1)
ΔWACF
(-7.88)*
(-7.88)*
(-7.82)
[0.00]*
(-7.77)
[0.00]*
(-7.82)
[0.00]*
(7.77)
[0.00]*
Note: Values in () and [] show t-statistics and probability respectively. *, **, *** show significance at
1%, 5% and 10% level respectively. Null Hypothesis of DF, ADF and PP: Variable has a unit root.
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
298
The Sequential Modified LR Test Statistic (LR), the Final Prediction Error (FPE), AIC, SC
and HQ Information Criterion presented a lag length of 2 for the conducting cointegration. Lag-
length selection according to the VAR model showed that all dots were within the circle at the
polynomial graph. Table 3 presents the ARDL (2,2) and NARDL (2,0,0) models.
The ARDL (2,2) model included DUMMY1 (it is defined as 1 for 2014M08; as 0 for the
other months) because of the instability of the . Inclusion of DUMMY 1 ensures the
stability for the overall model. In addition, other diagnostic test results [Jarque-Bera test for
normality (
, Breusch-Godfrey Serial Correlation LM test (
, ARCH test for
heteroscedasticity (
, Ramsey’s reset test for misspecification of model (
] and statistics
of the model indicated that there was no problem statistically within the ARDL (2,2)
model.
The finding of the Bound Test indicated that the estimated F-statistic value was statistically
significant, and it was higher than the critical value of the upper bound of Narayan's (2005) table.
WACF affected IRCL positively and significantly in the long and short run. The long-run findings
indicated that a 1 % increase (decrease) in the WACF was able to lead to an increase (decrease)
of 1.094 % in IRCL. Thus, commercial lending rates exhibited an overshooting reaction to the
changes in the policy rates.
The short-run estimates were 0.242 and 0.257 respectively. This meant that the commercial
lending rate pass-through was incomplete. The estimation of the EC was -0.167. When the CBRT
changed the policy rate, the adjustment took around 6 months for the commercial lending rate to
reach its long-run equilibrium value.
Table 3. ARDL and NARDL Models: (2011:01-2016:12)
ARDL (2,2)
NARDL (2,0,0)
Bound Test
F statistic
F statistic
4.460**
5.278*
Long Run
Variable
Coef
Prob
Variable
Coef
Prob
WACF
1.094
0.000*
WACF_POS
1.234
0.000*
DUMMY1
-6.568
0.055**
WACF_NEG
1.249
0.000*
C
5.123
0.018**
DUMMY1
-6.017
0.028**
C
11.847
0.000*
Error
Correction
Model
D(IRCL(-1))
0.252
0.008*
D(IRCL(-1))
0.288
0.003*
D(WACF)
0.242
0.007*
D(WACF_POS)
0.337
0.003*
D(WACF(-1))
0.257
0.011**
D(WACF_NEG)
0.134
0.397
D(DUMMY1)
-1.305
0.002*
D(DUMMY1)
-1.431
0.001*
EC(-1)
-0.167
0.001*
EC(-1)
-0.211
0.000*
Wald Test
0.037 (0.848)
Symmetric
(-)
Model
Statistics
0.501
0.386
0.453
0.338
F
10.541 (0.000)
F
8.038 (0.000)
Diagnostic
Tests
0.362(0.835)
0.772(0.680)
0.097(0.907)
0.221(0.802)
0.043(0.958)
0.591(0.557)
0.599(0.442)
1.065(0.306)
Stable
Stable
Stable
Stable
Note: *, **, *** show significance at 1%, 5% and 10% level respectively.
Ekonomi, Politika & Finans Araştırmaları Dergisi, 2024, 9(2): 287-305
Journal of Research in Economics, Politics & Finance, 2024, 9(2): 287-305
299
If there is an asymmetric relationship in the model, the ARDL model may not present
correct results. For this reason, the NARDL model is also estimated to test asymmetry with the
Wald test. The findings of NARDL showed that there was a positive and statistically significant
relationship between WACF and IRCL in the long run. The short-run results indicated that while
the increment of WACF increased IRCL, the decrease in WACF did not have a statistically
significant effect on IRCL. However, the Wald test results did not support asymmetry in the long
run. As a result, the pass-through from the policy rate to the commercial lending rate was
symmetric between 2011:01 and 2016:12 for Türkiye. The findings of the NARDL Wald Test
confirmed the robustness of the ARDL model.
4.2. Results of Second Period: (2017:01-2023:10)
Table 4 shows the results of the DF, ADF, and PP tests. The findings indicate that IRCL is
I(1), while WACF is I(0). Since time series do not need to be cointegrated in the same order, this
study applied the ARDL and NARDL models for the period of 2017:01-2023:10.
Table 4. Unit Root Tests: (2017:01-2023:10)
Variable
DF
ADF
PP
Status
Intercept
Intercept
and
Trend
Intercept
Intercept
and
Trend
Intercept
Intercept
and Trend
IRCL
(-1.70)***
(-2.52)
(-1.97)
[0.30]
(-2.07)
[0.56]
(-1.26)
[0.64]
(-1.30)
[0.88]
I(1)
ΔIRCL
(-3.68)*
(-3.84)*
(-3.68)
[0.01]*
(-3.83)
[0.02]**
(-3.68)
[0.01]*
(-3.83)
[0.02]*
WACF
(-2.84)*
(-3.45)**
(-3.37)
[0.02]**
(-3.20)
[0.09]***
(-1.75)
[0.40]
(-1.69)
[0.75]
I(0)
ΔWACF
(-4.36)*
(-4.45)*
(-4.33)
[0.00]*
(-4.40)
[0.00]*
(-4.46)
[0.00]*
(-4.53)
[0.00]*
LR, FPE, and AIC presented a lag length of 4 for the conducting cointegration. Lag-length
selection according to the VAR model indicates that all dots are within the circle at the polynomial
graph. Table 5 presents the ARDL (2,2) and NARDL (2,4,0) models.
The ARDL (2,2) includes DUMMY2 (it is defined as 1 for 2021M12-2022M08; as 0 for
the other months) to resolve the instability of The inclusion of DUMMY2 ensures the
stability for the overall model. Thus, all diagnostic test results and statistics of the model show
that there is no problem statistically within the model. The Bound test result of the ARDL (2,2)
model showed that the calculated F-statistic value was statistically significant and there was a
cointegration between WACF and IRCL.
WACF affected IRCL positively and significantly in the long and short run. The long-run
results indicated that a 1 % increase (decrease) in the WACF was able to lead to an increase
(decrease) of 0.898 % in IRCL. This means that the long-run pass-through is incomplete for the
period of 2017:01-2023:10. The short-run estimates were 0.733 and 0.472 respectively. Thus,
commercial lending rates exhibited a lower reaction. The estimate of the EC was -0.248 and
statistically significant. The adjustment took around 4 months for the commercial lending rate to
reach its long-run equilibrium value when CBRT changed the policy rate.
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
300
Although the NARDL model provided significant coefficients, the findings of the Wald
test did not support asymmetry in the long run. Thus, the pass-through of the commercial lending
rates was symmetric for the period of 2017:01-2023:10 in Türkiye. The findings of the NARDL
Wald Test confirmed the robustness of the ARDL model.
Table 5. ARDL and NARDL Models: (2017:01-2023:10)
ARDL (2,2)
NARDL (2,4,0)
Bound
Test
F statistic
F statistic
7.065*
8.706*
Long Run
Variable
Coef
Prob
Variable
Coef
Prob
WACF
0.898
0.000*
WACF_POS
0.739
0.000*
DUMMY2
7.364
0.000*
WACF_NEG
0.751
0.000*
C
5.222
0.008*
DUMMY2
8.256
0.000*
C
13.409
0.000*
Error
Correction
Model
D(IRCL(-1))
0.253
0.009*
D(IRCL(-1))
0.304
0.002*
D(WACF)
0.733
0.000*
D(WACF_POS)
0.850
0.000*
D(WACF(-1))
0.472
0.001*
D(WACF_POS(-1))
0.518
0.009*
D(DUMMY2)
3.129
0.002*
D(WACF_POS(-2))
-0.178
0.388
EC(-1)
-0.248
0.000*
D(WACF_POS(-3))
0.506
0.010**
D(WACF_NEG)
0.333
0.090***
D(DUMMY2)
3.242
0.001*
EC(-1)
-0.287
0.000*
Wald Test
0.046 (0.831)
Symmetric
-
Model
Statistics
0.736
0.761
0.714
0.729
F
33.846
(0.000)
F
23.754
(0.000)
Diagnostic
Tests
3.724(0.155)
0.284(0.868)
0.667(0.617)
0.721(0.581)
1.008(0.409)
0.164(0.956)
2.075(0.154)
0.325(0.571)
Stable
Stable
Stable
Stable
5. Conclusion and Policy Recommendations
Monetary policy has a crucial function for the CBRT's two important targets of price
stability and financial stability. For central banks to achieve their purpose through the interest rate
channel, banks' rates need to be directed in line with targets. Hence, interest rate pass-through is
an important topic for the central banks. While an incomplete pass-through may cause a failure
of monetary policies, a complete one ensures its success because the bank's deposit and lending
rates determine the decisions of the economic units about investment, savings, and consumption.
When the policy rate is lowered by applying an expansionary monetary policy aimed at
stimulating economic activity and this decrease is reflected in the bank's lending rate completely,
economic units increase consumption and investment expenditures. Thus, the aggregate demand
and production also increase. On the other hand, when central banks increase the policy rate by
applying the contractionary monetary policy in order to curb inflation, and this increase reflects
bank's lending rate completely, total output decreases due to the decrement of the expenditures.
Ekonomi, Politika & Finans Araştırmaları Dergisi, 2024, 9(2): 287-305
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301
Hence, inflationary pressure decreases. As a result, interest rate pass-through should be symmetric
and complete in a well-functioning macro-financial market.
This is exactly why the interest rate pass-through is an important research topic in terms of
demonstrating the success or failure of monetary policy. This study aimed at testing the pass-
through within the framework of the Monetary Policy Approach by using linear ARDL and
NARDL models for two periods (2011:01-2016:12 and 2017:01-2023:10). Testing two periods
and comparing the results of these periods with ARDL and NARDL makes this study different
from other studies that have analyzed Türkiye.
NARDL Wald test results indicated that pass-through was symmetric for both periods.
Symmetric pass-through made it possible to discuss and compare the findings of linear ARDL
models. According to the long-run results, the coefficient of the pass-through was higher than 1
in the first period while it was lower than 1 in the second period. Short-run findings presented
that the coefficient was lower in the first period compared to the second period. The speed of
adjustment was faster in the second period.
The finding of the symmetry is in line with Yuksel and Metin Ozcan (2013) and Sahin
(2019). The long-run results of the second period are similar to the studies conducted by
Buberkoku and Kizilder (2019), Bulut (2020), Salihoglu and Hepsag (2021). Lastly, the speed of
adjustment for the second period is similar to the study of Cavusoglu (2010). Symmetric pass-
through for both periods is a very important advantage for the CBRT. CBRT may control overall
the macroeconomy and reach its aims more easily due to the symmetry. Although the long-run
findings are statistically significant for both periods, coefficients differ from each other. This
difference indicates that different factors may have been effective for interest rate pass-through.
The overshoot of commercial lending rates in the first period may be related to the reaction of
banks against asymmetric information. Banks may not have rationed the amount of loan supply
and may have chosen to increase lending rates to counter moral hazard and adverse selection
problems in the first period. The incomplete pass-through in the second period could be caused
by many different factors as weak competition or power market, rationing of credit supply,
economic contraction, rising uncertainty, large amounts of public debt, temporary and unexpected
changes in policy rates, and adjustment costs. Frequent changes in the policy rate in the second
period may have caused weak pass-through due to adjustment costs. Thus, the stability of the
policy rate is so important for a complete pass-through.
As a result, the interest rate pass-through of Türkiye is overshoots in the first period while
it is incomplete in the second one. These findings require policy recommendations for
strengthening interest rate pass-through. The stability of macroeconomic variables is important
for the pass-through because the stability of policy rates depends on the stability of
macroeconomic variables. The instability of the general level of prices may lead to frequent
changes in policy interest rates. It is recommended to be patient and decisive for the
contractionary monetary policies applied to reduce inflation for Türkiye. If inflation is
permanently reduced, the policy rate can be stable and the stability of the interest rate will
strengthen the interest rate pass-through. Since a high level of public debt negatively affects pass-
through, it is recommended to pay special attention to fiscal discipline. If the CBRT avoids
unexpected and temporary changes to the policy rate, pass-through will be complete or almost
complete. Asymmetric information may cause both upward and downward rigidity for lending
rates. For this reason, it will be useful to focus on the solution of asymmetric information
N. Akşehirli, “Interest Rate Pass-Through in Türkiye: Evidence of the Monetary Policy Approach”
302
problems in commercial loan markets. A good way to solve these problems is for the supplier of
the loans to have reliable and detailed information from a neutral institution. Finally, the speed of
adjustment is so important for the decisions of central banks. CBRT should take into account the
speed of adjustment determined in this study to timely adjust the policy rate and monetary policy
decisions.
If these recommendations are put into practice, the interest rate pass-through may be
complete. Achieving price stability will be easier and faster when the interest pass-through is
complete or almost complete. Additionally, a complete pass-through will increase the resilience
of the financial system against macro-financial risks and shocks from both internal and external
sources.
Declaration of Research and Publication Ethics
This study which does not require ethics committee approval and/or legal/specific permission complies
with the research and publication ethics.
Researcher’s Contribution Rate Statement
I am a single author of this paper. My contribution is 100%.
Declaration of Researcher’s Conflict of Interest
There is no potential conflicts of interest in this study.
Ekonomi, Politika & Finans Araştırmaları Dergisi, 2024, 9(2): 287-305
Journal of Research in Economics, Politics & Finance, 2024, 9(2): 287-305
303
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