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We test the expectations hypothesis by analyzing changes in three month T-Bill rates (TB3) after FOMC meetings. By estimating the revisions in expectations of future overnight rates, we find a one-to-one relationship between changes in TB3 and path revisions.

Central bank credibility is critical for the effectiveness of monetary policy. The measures of credibility that are based on the changes in actual inflation rate do not perform very well in environments of chronic inflation. We design an alternative measure that allows us to track the evolution of credibility in an inflationary environment. Credibility is defined as the central bank's ability to lower inflation expectations towards its inflation target via current interest rate decisions. We adopt a Bayesian set up to exploit this definition and document how credibility changes over time. Our measure differs from the existing measures that are based on the deviation of inflation expectations from the inflation target. We show that the latter tests may be too blunt in the EM context and either overlook marginal improvements in credibility or incorrectly attribute the temporary reductions in the inflation rate to improvements in credibility. Utilizing a time varying parameters modeling structure, we show that the credibility of the Central Bank of the Republic of Turkey (CBRT) has declined significantly over time. Potential reasons for this deterioration could be the CBRT's disappointing performance in hitting the inflation target and its exposure to political pressures. We apply our methodology to Brazil as well to highlight its advantages and draw a comparison to the existing literature.

AbstractIslamic banks create an interest in their own right as a rising branch in financial intermediation, particularly in the post-crisis era. In addition, they also deserve the attention of students of Islamism due to their possible connection with Islamic movements. Through a comparison of Islamic and conventional banking, we analyze the motivations and behavior of Islamic economic actors who determine the cash flow to Islamic banks. Our findings suggest that, in contrast to popular views that portray these actors as ideologues or financiers of radical Islam, they have pragmatic motivations and may adapt to liberal systems in order to seize economic incentives.

The transmission mechanism of monetary policy has received extensive treatment in the macroeconomic literature. Most models currently used for macroeconomic analysis exclude money or else model money demand as entirely endogenous. Nevertheless, academic research and many textbooks continue to use the money multiplier concept in discussions of money. We explore the institutional structure of the transmission mechanism beginning with open market operations through to money and loans to document that the mechanism does not work through the standard multiplier model or the bank lending channel. Our analysis, however, does not reflect on the existence of a broader credit channel.

This paper provides a dynamic analysis of the responsiveness of asset markets to monetary policy path revisions. In an era of increased transparency and gradualism in policy making, one might expect an increased response to path revisions in asset markets as the policy actions become more predictable over longer horizons. Using federal funds futures contracts to extract near-term path revisions, we find that the responsiveness of Treasury securities to path revisions is significantly asymmetric, increasing during cycles of tightenings and declining during easings. This is consistent with the earlier literature that documents asymmetric effects of monetary policy on output.

Over the course of the recent liquidity crisis, the Federal Reserve made several changes to its primary credit lending facility such as narrowing the spread between the primary credit rate and the target funds rate and increasing the term of the borrowing. In this paper, we use the model developed by Artuç and Demiralp (2008) to provide a structural assessment of the effectiveness of these changes. Our results suggest that these changes were effective in stabilizing the federal funds market.

We explore the effect of volatility in the federal funds market on the expectations hypothesis in money markets. We find that lower volatility in the bank funding markets market, all else equal, leads to a lower term premium and thus longer-term rates for a given setting of the overnight rate. The results appear to hold for the US as well as the Euro Area and the UK. The results have implications for the design of operational frameworks for the implementation of monetary policy and for the interpretation of the changes in the Libor-OIS spread during the financial crisis.

In June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks' reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks' balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less on wholesale funding. The nature and scope of the adjustment depends on banks' business models.

AbstractIn this article, we investigate economic and political developments in Turkey's construction sector over the last decade and consider their implications. We find that during the first term of the government of the Justice and Development Party (Adalet ve Kalkınma Partisi, AKP), thanks to administrative and economic incentives, both private and public construction rose considerably. Despite the construction sector's contribution to growth, there is also evidence of a transfer from the industrial sector toward the construction sector, which led to significant decline in the trend growth of the industrial sector in the era prior to 2006. Such evidence disappears in the post-crisis period, when the growth of private construction slows. However, overcentralization, clientelism, an absence of transparency, and limitations on citizen participation in urban planning remain as problems that need to be addressed through urban reform.