Psychological Motives in the Conduct of Monetary Policy: Delayed Actions

The effects of increasing versus decreasing interest rates on economic performance differ in an economy. In Türkiye, members of the Central Bank’s Monetary Policy Committee are criticized by governments when interest rates are increased and praised when they are decreased. Therefore, we examine whether there is a psychological motive for the Committee’s actions when interest rates need to be increased or decreased. In this study, Bai and Ng’s symmetry tests are applied to the Central Bank’s interest rate decisions. The results show that Türkiye’s short-term interest rate changes are positively skewed, which suggests that the Central Bank is more likely to decrease rather than increase interest rates when needed. Thus, interest rate increases occur less frequently than decreases, as suggested by positive skewness (third moment), and have larger magnitudes in raises, as suggested by hyperskewness (fifth moment). Implementing legal and institutional reforms to protect members of the Monetary Policy Committee from political pressure could therefore be a vital step. This could include terms of appointment that ensure longer tenure and protection against arbitrary dismissal; clear legal mandates that prioritize economic objectives such as price stability and financial stability; and statutory provisions that limit the government’s ability to interfere in monetary policy decisions.