Regional Effects of Monetary Policy: Turkey Case

Abstract

Monetary policy is primarily designed for national purposes, say price stability. However, its impact may vary significantly across regions. Why some regions respond more strongly to monetary policy is a challenging topic both theoretically and empirically. Indeed, three main hypothesis on this issue have been put forward: (i) regions with high share of manufacturing, (ii) regions that include higher proportion of small-scale firms and banks, (iii) regions which are more open to trade are likely to respond more strongly to changes in monetary policy. Although these hypotheses have been thoroughly and heatedly discussed by a strand of scholars, far little attention has been paid to the role of geographical factors and spatial spillovers. In fact, we precisely address this issue. Aim of the present paper is to examine the validity of three hypotheses and, additionally, the role of spatial spillovers in regional monetary transmission mechanism in Turkey. Our analyses indicate three major results: First, provinces respond quite heterogeneously to unexpected changes in monetary policy. Second, spatial spillovers and geographical proximity clearly matter in monetary transmission such that neighboring regions are likely to exhibit similar reactions to monetary policy. Third, among the hypothesis above bank size and trade openness are found to be significant.