Financial Frictions and Monetary Policy Effectiveness in Türkiye

Financial friction affects the real economy through cyclical fluctuations. Therefore, financial friction must be considered when conducting monetary policy. This situation became even more pronounced with the 2008 financial crisis. As a result, many central banks, including the Central Bank of Turkey (CBRT), added a financial stability target alongside their price stability target. However, studies considering the impact of financial friction in Türkiye are quite limited, both in academic research and for policymakers. This study aims to investigate how financial friction affects monetary policy in Türkiye. In this context, the New Keynesian (NK) DSGE model, designed by Gertler and Karadi (2011) and including financial friction originating from the banking sector, has been extended for Turkey and estimated using Bayesian methods for the quarterly period 2011–2024. The findings of the model show that negative shocks originating from the financial system negatively affect investment, consumption, and output. It was observed that monetary policy responds to these shocks with a limited and delayed response. In contrast, an external interest rate shock is strongly transmitted to the real economy through financial friction. These results indicate that financial friction increases the effectiveness of internal monetary policy in Türkiye while strengthening the transmission of an external interest rate shock.