The Effect Of Short Term Interest Rates On Long Term Interest Rates In Turkey (2002-2011)

Effect of monetary policy that applied by Central Banks on the real economy depends on action power of Central Banks to long term interest rates by using short term interest rates. However, while Central Banks may have a direct effect on short term interest rates, they influence long term interest rates indirectly. In this study, the effect of short term policy interest rates in inflation targeting framework, on the long term interest rates is examined. Having disaggregated the expected and unexpected components of changing in policy rate, it is concluded that policy rates response to unanticipated components more than to anticipated components. The results showed that, monetary transmission mechanism is effective and confirm the existence of the term structure of interest rate in the sense of the expectation hypothesis.