Citation:

Nurlan Alisoylu. "Analysis of Transmission Mechanism on Azerbaijan’s Banking Sector" International Research Journal of Economics and Management Studies, Vol. 5, No. 4, pp. 82-87, 2026. Crossref. http://doi.org/10.56472/25835238/IRJEMS-V5I4P111

Abstract:

This study investigates the monetary transmission mechanism in Azerbaijan’s banking sector, focusing on how changes in monetary policy affect bank funding costs and overall financial intermediation. Using a panel data approach, the analysis examines bank-level responses across different macroeconomic periods, including the crisis and devaluation phase (2014–2017), the recovery and growth period (2018–2022), and the post-recovery phase (2022–2025). The results indicate that the effectiveness of monetary policy transmission is time-varying and strongly influenced by macroeconomic stability and structural features of the banking system. During the crisis period, the traditional interest rate channel is significantly weakened, with banks showing non-standard responses to policy rate changes due to heightened financial stress and currency instability. In contrast, the recovery period demonstrates a restored and statistically significant transmission mechanism, where policy rate increases lead to higher bank funding costs. The findings also highlight the importance of exchange rate dynamics, dollarization, and bank heterogeneity in shaping transmission outcomes. Furthermore, market concentration and the dominance of large banks create asymmetries in the transmission process, limiting uniform policy effects across the sector. Overall, the study concludes that while monetary transmission in Azerbaijan has improved over time, structural constraints within the banking sector continue to affect its efficiency and consistency.

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Keywords:

Monetary Transmission Mechanism, Banking Sector, Monetary Policy, Financial İntermediation, İnterest Rate Channel, Dollarization, Market Concentration, Azerbaijan, Panel Data Analysis, Exchange Rate Dynamics.