The Causal Relationship between Inflation and Interest Rate in Turkey
The Causal Relationship between Inflation and Interest Rate in Turkey

Author(s): Özcan Karahan, Metehan Yılgör
Subject(s): National Economy, Economic history, Transformation Period (1990 - 2010), Present Times (2010 - today), Financial Markets
Published by: Masarykova univerzita nakladatelství
Keywords: Inflation; Interest Rate;
Summary/Abstract: The causal nexus of inflation and interest rate has a significant role in the application of monetary policy. Indeed, interest rate-inflation nexus is important for policy makers to be effective in selection of the monetary policy aims and tools. However, there is no consensus among the economists about the direction of the causality relationship between inflation and interest rate. Some economists, in the framework of Fisher Hypothesis, argue that there is a positive causal relationship from inflation rate to nominal interest rate. Contrarily, other economists assert that any increase in interest rate accelerates inflation rate by raising the cost-push inflation. This paper aims to examine the relationship between inflation and interest rate in the case of Turkey in order to make a new contribution to the discussions about the direction of causality among the interest rate and inflation. We examine the interest rate-inflation nexus for the term 2002-2016 in Turkey by employing the cointegration and causality tests. The empirical results confirm that there exists a unidirectional causality from inflation to interest rate. From the policy perspective, it can be concluded that to provide price stability is essential for managing interest rate efficiently for Turkish economy.

• Details
• Contents