2017-2018 Exchange Rate Turbulence and New Monetary Policy Tools of the Central Bank of the Republic of Turkey

A significant impact of unconventional monetary policy implemented by central banks of developed countries has been on diversity and depth of foreign exchange swap markets. In this study, the methods of implementation of the CBRT’s new monetary policy instruments -foreign exchange deposits against Turkish Lira deposits (swap transactions) and Turkish Lira-settled forward foreign exchange sale transactions- are explained. The aim of this study is to analyze the impact of swap action as a new monetary policy instrument of the Central Bank of the Republic of Turkey (CBRT) on TRY, CBRT policy rate, and cross-currency basis swap of US Dollar/Turkish Lira (USD/TRY) in the London market. The relationship between basis swap of the USD/TRY in the London market, the CBRT policy rate, the CBRT overnight borrowing interest rate, and USD/TRY was analyzed by Granger causality test. Our analysis reveals that there is a bilateral causality between basis swap of TRY in the London market and the USD/TRY, between the USD/TRY and the CBRT policy rate, between the CBRT policy rate and the CBRT overnight borrowing interest rate, and between the CBRT overnight borrowing interest rate and the USD/TRY. In addition, a change in basis swap of USD in the London market is a cause of the CBRT policy rate and in USD/TRY. Lastly, a change in basis swap of TRY in the London market is a cause of the CBRT policy rate