The Relationship between the Exchange Rate, Interest Rate and Inflation: The Case of Turkey

Ercan Özen, Letife Özdemir, Simon Grima

Abstract


The purpose of the study is to measure the effects of changes in exchange rates and interest rates on inflation and to determine which of the exchange rates or interest rates has a greater impact on inflation rate following the July 15, 2016 coup attempt in Turkey. Our expectation is that similar to most authors is to find that there is a long-term relationship between the inflation rates and both the exchange rate and interest rates and that the effect of the exchange rate on the Producer Price Index (PPI) is greater than that of the interest rates. Moreover, we expect to find a unidirectional causality relationship between the Interest Rate of Commercial Banks Credit (IRBC), Over Night Interest Rate (O/N) and United States Dollar (USD) and the PPI, but not between the IRBC, O/N, USD and the Consumer Price Index (CPI).


Keywords


Turkey; Foreign Exchange; Interest rate; Inflation; Fisher Effect.

JEL Codes


F31; O24; E4; E31; E43; P24; P44.

Full Text:

PDF

References


Adom, P. K., Amakye, K., Barnor, C., and Quartey, G., 2015. The long-run impact of idiosyncratic and common shocks on industry output in Ghana. OPEC Energy Review, 39(1), 17-52. http://dx.doi.org/10.1111/opec.12039

Akinci, M., and Yilmaz, O., 2016. Enflasyon-Faiz Orani Takasi: Fisher Hipotezi Baglaminda Turkiye Ekonomisi Icin Dinamik En Kucuk Kareler Yontemi (The Trade-Off between Inflation and Interest Rate: A Dynamic Least Squares Method for Turkish Economy in the Context of Fisher Hypothesis). Sosyoekonomi, 24(27), 33-55. http://dx.doi.org/10.17233/se.81444

Amaefula, C. G., 2016. Long-Run Relationship between Interest Rate and Inflation: Evidence from Nigeria, IOSR. Journal of Economics and Finance, 7(3), 24-28.

Asari, F. F. A. H., Baharuddin, N. S., Jusoh, N., Mohamad, Z., Shamsudin, N., and Jusoff, K., 2011. A vector error correction model (VECM) approach in explaining the relationship between interest rate and inflation towards exchange rate volatility in Malaysia. World Applied Sciences Journal, 12(3), 49-56.

Berke, B., 2012. Exchange Rate and IMKB100 Index Relationship: A New Test. Maliye Dergisi, 163, 243-257.

Berument, H., Ceylan, N. B., and Olgun, H., 2007. Inflation Uncertainty and Interest Rates: Is the Fisher Relation Universal? Applied Economics, 39(1), 53-68. http://dx.doi.org/10.1080/00036840500427908

Beyer, A., Haug, A. A., and Dewald, W. G., 2009. Structural Breaks, Co-integration and the Fisher Effect. European Central Bank Working Paper, 1013.

Brooks, C., 2008. Introductory Econometrics For Finance (2nd ed. ed.). Cambridge: Cambridge University Press. http://dx.doi.org/10.1017/CBO9780511841644

Camilleri, S. J., Grima, L., and Grima, S., 2019. The effect of dividend policy on share price volatility: An analysis of Mediterranean banks' stocks. Managerial Finance, 45(2), 348-364. http://dx.doi.org/10.1108/MF-11-2017-0451

Central Bank of the Republic of Turkey, 2019. official website. from http://bit.do/fH9Hu

Coppock, L., and Poitras, M., 2000. Evaluating the Fisher Effect in Long-Term Cross-Country Averages. International Review of Economics & Finance, 9(2), 181-192. http://dx.doi.org/10.1016/S1059-0560(99)00057-X

Dickey, D. A., and Fuller, W. A., 1979. Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74, 427-431.

Dutt, S. D., and Ghosh, D., 1995. The Fisher Hypothesis: Examining the Canadian Experience. Applied Economics, 27(11), 1025-1030. http://dx.doi.org/10.1080/00036849500000084

Ekren, N., 2000. Performance of Economic Management: The Need for Strategic Change and Renewal Aktive Bankacılık ve Finans Makaleleri-II, Aktive Line Gazetesi Eki, 1(8).

Granger, C. W. J., 1988. Some Recent Developments in a Concept of Causality. Journal of Econometrics, 39(1-2), 199-211. http://dx.doi.org/10.1016/0304-4076(88)90045-0

Gujarati, D. N., 2001. Basic Econometrics. Istanbul: Literatür Publishing.

Gül, E., and Ekinci, A., 2006. The Causal Relationship Between Exchange Rates and Inflation in Turkey: 1984-2003. Anadolu University Journal of Social Sciences, 91–106.

Herwartz, H., and Reimers, H. E., 2006. Modelling the Fisher Hypothesis: Wold Wide Evidence. CAU Working Paper, 2006-04.

Inder, B., and Silvapulle, P., 1993. Does the Fisher Effect Apply in Australia? Applied Economics, 25(6), 839-843. http://dx.doi.org/10.1080/00036849300000138

Iscan, H., and Kaygisiz, A. D., 2019. Turkiye'de Doviz Kuru, Enflasyon ve Faiz Orani Iliskisi: 2009-2017 Uygulamasi (Exchange Rate, Inflation and Interest Rate Relationship in Turkey: 2009-2017 Application). Igdır University Journal of Social Sciences(17), 581-604.

Ito, T., 2009. Fisher Hypothesis in Japan: Analysis of Long-Term Interest Rates Under Different Monetary Policy Regimes. World Economy, 32(7), 1019-1035. http://dx.doi.org/10.1111/j.1467-9701.2009.01193.x

Johansen, S., 1988. Statistical analysis of co-integrating vectors. Journal of Economic Dynamics & Control, 12(2-3), 231-254. http://dx.doi.org/10.1016/0165-1889(88)90041-3

Johansen, S., and Juselius, K., 1990. Maximum Likelihood Estimation And Inference On Co-integration: With Application To The Demand For Money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210. http://dx.doi.org/10.1111/j.1468-084.1990.mp52002003.x

Kasman, S., Kasman, A., and Turgutlu, E., 2006. Fisher Hypothesis Revisited: A Fractional Co-integration Analysis. Emerging Markets Finance & Trade, 42(6), 59-76. http://dx.doi.org/10.2753/REE1540-496X420604

Kholdy, S., and Sohrabian, A., 1990. Exchange Rates and Prices: Evidence from Granger Causality Test. Journal of Post Keynesian Economics, 13(1), 71-78. http://dx.doi.org/10.1080/01603477.1990.11489832

Lardic, S., and Mignon, V., 2003. Fractional Co-integration between Nominal Interest Rates and Inflation: A Re-Examination of the Fisher Relationship in the G7 Countries. Economic Bulletin, 3(14), 1-10.

Leigh, D., and Rossi, M., 2002. Exchange Rate Pass- Through in Turkey. IMF Working Paper, WP/02/204.

Linden, M., 1995. Interest Rate and Inflation Expectations in Finland 1987-1994: A Case for the Inverted Fisher Hypothesis, Finnish. Economic Papers, 8(2), 108-115.

Madsen, J. B., 2005. The Fisher Hypothesis and the Interaction between Share Returns, Inflation and Supply Shocks. Journal of International Money and Finance, 24(1), 103-120. http://dx.doi.org/10.1016/j.jimonfin.2004.11.003

Oner, H., 2018. Doviz Kuru ve Enflasyon Arasindaki Nedensellik Iliskisi: Turkiye Uygulamasi. (The Casuality Relationship Between Exchange Rate and Inflation Rates: The Case of Turkey). Hitit University Journal of Social Sciences Institute, 11(1), 343-358. http://dx.doi.org/10.17218/hititsosbil.398547

Phillips, P. C. B., and Hansen, B. E., 1990. Statistical inference in instrumental variables regression with I(1) processes. The Review of Economic Studies, 57(1), 99-125. http://dx.doi.org/10.2307/2297545

Phillips, P. C. B., and Perron, P., 1988. Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335-346. http://dx.doi.org/10.1093/biomet/75.2.335

Priyankara, E. A. C., 2018. The Long-run Effect of Services Exports on Total Factor Productivity Growth in Sri Lanka: Based on ARDL, FMOLS, CCR, and DOLS Approaches. International Journal of Academic Research in Business & Social Sciences, 8(6), 74-92. http://dx.doi.org/10.6007/IJARBSS/v8-i6/4180

Rana, P. B., and Dowling, J., 1985. Inflationary Effect of Small Continuous Changes in Effective Exchange Rate: Nine Asian LDCs. The Review of Economics and Statistics, 67(3), 496-500. http://dx.doi.org/10.2307/1925979

Rittenberg, L., 1993. Exchange Rate Policy and Price Level Changes: Causality Test for Turkey in the Post Liberalization Period. The Journal of Development Studies, 29(2), 245-259. http://dx.doi.org/10.1080/00220389308422272

Seyidoglu, H., 2003. Uluslararasi Finans (International Finance) (4th ed. ed.). Istanbul: Guzem Cem Publishing House.

Shahbaz, M., 2009. A Reassessment of Finance-Growth Nexus for Pakistan: Under the Investigation of FMOLS and DOLS Techniques, The IUP. Journal of Applied Econometrics, 8(1), 65-80.

Taban, S., and Sengur, M., 2016. An Econometric Analysis to Determine the Source of Inflation in Turkey. Erciyes Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi(47), 47-64.

Terzi, H., and Zengin, H., 1996. A Study on the Causality Between Inflation and Currency Turkey. MÜ İstatistik ve Ekonometri Araştırma ve Uygulama Merkezi Dergisi(1), 3-25.

Wong, K. F., and Wu, H. J., 2003. Testing Fisher Hypothesis in Long Horizons for G7 and Eight Asian Countries. Applied Economics Letters, 10(14), 917-923. http://dx.doi.org/10.1080/1350485032000158645

Yükseler, Z., 2019. Structural Changes During 1985-2012 Addiction and Imports In The Turkish Economy. http://dx.doi.org/10.13140/RG.2.2.12772.83844


Refbacks

  • There are currently no refbacks.
Bursa Escort bayan - Bursa Escort - Altıparmak Escort