The Role of Central Bank in Competitive Environment: A Study for Interest Rate Corridor Systems

The Role of Central Bank in Competitive Environment: A Study for Interest Rate Corridor Systems

Mustafa Eser Kurum (Yeni Yüzyıl University, Turkey) and Suat Oktar (Marmara University, Turkey)
DOI: 10.4018/978-1-7998-2559-3.ch018

Abstract

This chapter evaluates the macroeconomic impact of the interest rate corridor policy implemented by the central bank in Turkey. In this context, firstly the general framework, types and application of interest rate corridor policy are explained. Then, the interest rate corridor policy implemented by the CBRT after the global crisis was examined in detail. In addition, domestic and foreign literature examining the macroeconomic effects of the interest rate corridor policy has been included. This chapter examines the macroeconomic impact of the interest rate corridor policy implemented in Turkey using data from the 2011-2018 period. In the study, Engle-Granger Cointegration Analysis and Toda-Yamamoto Causality Analysis were used as models. As a result of the study, it was concluded that interest rate corridor had an effect on economic growth, foreign direct investment, and exchange rate variables.
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General Information About Interest Rate Corridor System

Since the intraday transactions in the interbank market are uncertain, the reserve requirement of each bank at the end of the day is uncertain. For example, a bank with a surplus liquidity surplus may deposit deposits to the central bank in order to assess this surplus, while a bank with temporary liquidity shortage may benefit from the short-term credit facilities of the central bank (Whitesell, 2006).

In the corridor systems, a central bank provides two facilities, namely the possibility of lending to commercial banks provided that they pay a certain interest, and the possibility of deposit income in exchange for a deposit interest. While the central banks implement a corridor policy, the overnight market interest rate in the money market can be determined in close proximity to the targeted interest rate (Berentsen and Monnet, 2008).

In a classical corridor system, the policy rate of the central bank will be below the lending rate and above the deposit rate. Therefore, the lending rate constitutes an upper limit for short-term interest rates. (Revised Framework Monetary Operations, 2016). In corridor systems, there are two types of applications: interest rate corridor system and floor system. Below it will be given information about these systems.

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