Monetary policy and the banking sector in Turkey

•Monetary policy affected Turkish bank lending via the money and bank lending channels.•The efficiency of Turkish banks is shown to improve since the 1990s.•Turkish domestic banks are, on average, more efficient than foreign banks.•The increased efficiency of Turkish banks does not significantly affect bank lending.•We find no evident dynamics or fixed-effects in bank loan growth so use pooled-OLS.

We find that monetary policy influenced Turkish bank lending between 1991 and 2007 through the money and bank lending channels. While capital and GDP growth have positive and significant long-run effects on bank loan growth, inflation, bank size and efficiency are not significant determinants. The latter is despite our finding that all Turkish banks’ efficiency improved over the period. Domestic banks are unexpectedly found to be more efficient than foreign banks. With no evident dynamics or fixed-effects in loan growth we prefer the pooled-OLS estimator. We caution against assuming fixed-effects and dynamics are present as this may adversely affect inference.