Bank lending channel under high policy rate volatility: evidence from Turkiye
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Date
2025
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Abstract
This paper investigates the transmission mechanisms of high policy rate volatility episodes in Turkiye, characterized by sharp and unpredictable interest rate fluctuations. Focusing on the bank lending channel, we employ a time-varying parameter structural vector autoregression with stochastic volatility model to analyze the evolving impact of monetary policy on bank lending. Our analysis examines several key aspects: the relative effectiveness of a single, large policy rate change compared to a series of gradual adjustments; the potential non-linearity of transmission, investigating whether tight or lax monetary policy exhibits greater effectiveness; and the differential responses of rate-based conventional banks and profit-loss-sharing Islamic banks to monetary policy shocks. The key findings indicate that the effectiveness of the bank lending channel varies with the nature and magnitude of monetary policy shocks. Notably, episodes of substantial monetary tightening, especially when coupled with significant exchange rate depreciation, exert a more pronounced dampening effect on lending activity. Furthermore, Islamic banks are more sensitive to policy shocks, largely because of their distinct reliance on profit-sharing arrangements and liquidity-dependent funding models.
Keywords
Bank lending channel , Dual banking system , High policy rate volatility , Turkish monetary policy
Citation
Can, U., Kenc, T., & Cevik, E. I. (2025). Bank lending channel under high policy rate volatility: Evidence from Turkiye. The Quarterly Review of Economics and Finance, Article 102058. https://doi.org/10.1016/j.qref.2025.102058
Publisher
Elsevier Inc.