Heterogenous Responses To Monetary Policy Regimes: a Regional Analysis for Turkey, 2009-2019

Abstract

The heterogeneous response of regions to interest rate shocks is a severe issue that reduces the effectiveness of monetary policy. While the impact of interest rate shocks is central on policymaking, less has been discussed about the spatial heterogeneity in influencing macroeconomic policy implementations. In order to fill this gap, the authors explore regional responses to monetary policy in developing countries, such as Turkey. The main aim of the paper is to investigate how different regions adjust the extent of real economic activity in response to an exogenous country-wide shock in the interest rate policy. The analyses cover 81 Turkish provinces using monthly data from January 2009 to November 2019. To consider temporal and spatial patterns in the same framework, time-series analyses via unit root, co-integration, and VAR with spatial methods have been combined, including exploratory spatial data analysis and spatial econometric models. Preliminary findings validate that regional economic activity measured by employment responses is heterogeneous across provinces and policy regimes. Among the different determinants in assessing responsiveness to monetary policy shocks, interest rate, broad credit channels, and certain regional demographics have explanatory power. Moreover, sizeable spatial spillovers have been detected, which are believed to be crucial in evaluating the externalities and the exact impact of the country-wide policy shock in Turkey. Combined results indicate that the macroeconomic policy impact and spatial externalities are visible only during monetary expansion periods.