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

Özen, Ercan; Özdemir, Letife; Grima, Simon

doi:10.47743/saeb-2020-0014

Cited by 13 publications

(5 citation statements)

References 28 publications

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“…Thus, developing economies have been struggling to achieve steady economic growth [25]. Controlling inflation with the help of interest rates has become the only goal of many Central Banks during the previous few decades [26] because inflation targeting is a complete monetary framework that ensures price stability along with other monetary objectives [27][28][29]. However, inflationary pressures can lead to contractionary monetary policy that impacts economic growth, poverty, and inequality [30][31][32][33].…”

Section: Empirical Debatementioning

confidence: 99%

Inflation targeting: A time-frequency causal investigation

Islam,

Ahmed

2023

PLoS ONE

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The enduring discourse regarding the effectiveness of interest rate policy in mitigating inflation within developing economies is characterized by the interplay of structural and supply-side determinants. Moreover, extant academic literature fails to resolve the direction of causality between inflation and interest rates. Nevertheless, the prevalent adoption of interest rate-based monetary policies in numerous developing economies raises a fundamental inquiry: What motivates central banks in these nations to consistently espouse this strategy? To address this inquiry, our study leverages wavelet transformation to dissect interest rate and inflation data across a spectrum of frequency scales. This innovative methodology paves the way for a meticulous exploration of the intricate causal interplay between these pivotal macroeconomic variables for twenty-two developing economies using monthly data from 1992 to 2022. Traditional literature on causality tends to focus on short- and long-run timescales, yet our study posits that numerous uncharted time and frequency scales exist between these extremes. These intermediate scales may wield substantial influence over the causal relationship and its direction. Our research thus extends the boundaries of existing causality literature and presents fresh insights into the complexities of monetary policy in developing economies. Traditional wisdom suggests that central banks should raise interest rates to combat inflation. However, our study uncovers a contrasting reality in developing economies. It demonstrates a positive causal link between the policy rate and inflation, where an increase in the central bank’s interest rates leads to an upsurge in price levels. Paradoxically, in response to escalating prices, the central bank continues to heighten the policy rate, thereby perpetuating this cyclical pattern. Given this observed positive causal relationship in developing economies, central banks must explore structural and supply-side factors to break this cycle and regain control over inflation.

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Section: Empirical Debatementioning

confidence: 99%

Inflation targeting: A time-frequency causal investigation

Islam,

Ahmed

2023

PLoS ONE

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“…Ozen et al [2] measured the effects of changes in exchange rates and interest rates on inflation, to determine which of the exchange rates and interest rates has greater Impact on inflation rates following the July 15, 2016 coup attempt in Turkey. The study implemented the cointegration test, Fully Modified OLS and granger causality test.…”

Section: Brief Literature On the Dynamic Interrelationships Among Inf...mentioning

confidence: 99%

“…This is so because these variables can affects money supply, foreign exchange and, goods and services (output) of any economy such as Nigeria [1]. Economic theory revealed evidence of interrelationships among inflation, interest and exchange rates for example in Turkey [2] in Nigeria [1]. Such theory further states possible effects of money supply and GDP on inflation, interest and exchange rates.…”

Section: Introductionmentioning

confidence: 99%

Dynamics of Inflation, Interest and Exchange Rates with the Effects of Money Supply and GDP in Nigeria: Evidence from BVARX Models

Adenomon

Oduwole²

2022

AJPAS

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Economic theory revealed evidence of interrelationships among inflation, interest and exchange rates. Such theory further states possible effects of money supply and GDP on inflation, interest and exchange rates. This study focuses on the dynamic interrelationships among inflation, interest and exchange rates with the effects of money supply and GDP in Nigeria using Bayesian Vector Autoregression with Exogenous variables (BVARX) models. To achieve this, data was sourced from the Central bank of Nigeria (CBN) website spanning the period of 2010Q1-2020Q4. The study proposed six (6) versions of BVARX models with lag 2 using Normal-Wishart, Normal Flat and Flat-Flat priors. The results revealed superior BVARX models with Flat-Flat prior using Root Mean Square Error (RMSE) and Mean Absolute Error (MAE) as means of model selection. Lastly, evidence from Bivariate Granger causality testing reveals that the past lag values of inflation rate help in predicting exchange rate in Nigeria.

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“…FMOLS results show that the change in the exchange rate is more than the producer price index on bank interest rates. Also, a relationship between the consumer price index and interest rates couldn't be determined (Ozen et al, 2020).…”

Section: Literature Reviewmentioning

confidence: 99%

The Effects of Macroeconomic Factors on Bank Loan Interest Rates in Turkey

YILDIZ

2020

J. corp. gov. insur. risk manag.

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The purpose of the study to reveal how interest rates on loans offered to consumers by banks in Turkey are affected by macroeconomic factors. For this purpose, the personal loan interest rate is considered as the consumer loan interest rate, mortgage loan interest rate and vehicle loan interest rate. Macroeconomic factors, inflation, gold, exchange rate and money supply are included in the analysis. Three models have been established using monthly data for the period January 2009-June 2020. Firstly, cointegration test was applied to the models and it was determined that there is at least one cointegration relationship in each model. Long-term estimation results for the models are obtained by using the FMOLS method. In general, it was observed that the increase in the exchange rate tended to increase the bank loan interest rates, while the increase in the money supply lowered the bank loan interest rates. As a result of the causality analysis, bidirectional causality relationship from consumer loan interest rate to money supply and inflation, unidirectional causality from interest rate to gold price, unidirectional causality relationship from exchange rate to interest rate was determined. Unidirectional causality relationship from mortgage loan interest rate to money supply, unidirectional causality from exchange rate to interest rate was found. While it was determined that there is a bidirectional causality relationship between vehicle loan interest rate and money supply, gold price and inflation. It is expected that these results may guide banks and policymakers to determine interest rate policies.

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

Cited by 13 publications

References 28 publications

Inflation targeting: A time-frequency causal investigation

Inflation targeting: A time-frequency causal investigation

Dynamics of Inflation, Interest and Exchange Rates with the Effects of Money Supply and GDP in Nigeria: Evidence from BVARX Models

The Effects of Macroeconomic Factors on Bank Loan Interest Rates in Turkey

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