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2020•Scientific Annals of Economics and BusinessOpen access

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

Ercan Özen, Letife Özdemir, Simon Grima

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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).

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What this paper is about

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).

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Available 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).

Key concepts: Economics, Interest rate, International Fisher effect, Inflation (cosmology), Fisher hypothesis, Exchange rate, Monetary economics, Real interest rate

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