AN EFFORT TO CONSTRUCT A MECHANISM SIMILAR TO THE TAYLOR RULE MECHANISM: TESTS ON BIST-100

Abstract

Taylor's rule that is developed for the determination of interest rate, is a mechanism which determines the level of domestic interest rates based on internal and external factors. In the Taylor rule, while inflation and income are internal factors, exchange rate is external factor. Considering the strong functioning of this mechanism in terms of interest, it can be thought that the stock market may follow a similar path. Therefore, in addition to the variables listed in the Taylor rule, interest rate, gold prices and foreign exchange values were included in the model. Thus, while inflation (EA), interest (FA) and income (YA) were taken as internal factors, exchange rate (DA), gold (AA) and foreign stock exchange value (SA) are modeled as foreign element. All variables in models created under the Taylor rule are defined in open terms by subjecting them to Hodrick-Prescot Filtering. For the period between 1998: Q1-2019: Q3, linear and nonlinear models were estimated by L-ARDL and NL-ARDL methods, respectively. In the obtained results, EA variable was significant in L-ARDL results, whereas it was not significant in NL-ARDL results. In addition, all variables in the model were statistically significant. Accordingly, YA, FA and AA variables have negative effects on the stock market; SA and DA variables have positive effects on the stock market. From the obtained findings, stock in the framework of Taylor rule logic mechanisms in Turkey’s economy is seen to be influenced by internal and external variables. The fact that stock exchange has been effected by production that is by the economic growth among other variables put forward that monetary and thus speculative actions rather than real economic facts were more dominant. Oh the other hand it has been seen that all the other variables reflected general tendencies.

Jel Codes: B40, C51, G17.