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The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey

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  • Kose, Nezir
  • Emirmahmutoglu, Furkan
  • Aksoy, Sezgin

Abstract

This paper examines the relationship between nominal interest rates and the expected inflation rate for the Turkish economy between 2002 and 2009, a period when the inflation-targeting regime was implemented as monetary policy. We use the test of cointegrating rank with a trend-break (a method introduced by Inoue, 1999) and we also apply exogeneity tests. Empirical findings indicate that monetary policy rates depend on inflationary expectations; long-term interest rates are affected by monetary policy; and the weak form of the Fisher effect is valid. This evidence implies that monetary policy has actually influenced the real long-term interest rates; the inflation targeting regime pursued by the Central Bank of Turkey is reliable; and hence realized inflation has remained close to its targeted level.

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  • Kose, Nezir & Emirmahmutoglu, Furkan & Aksoy, Sezgin, 2012. "The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey," Journal of Asian Economics, Elsevier, vol. 23(4), pages 476-485.
    • Handle: RePEc:eee:asieco:v:23:y:2012:i:4:p:476-485
    DOI: 10.1016/j.asieco.2012.03.001
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    2. Burak Güriş & Yaşar Yaşgül, 2015. "Does the Fisher hypothesis hold for the G7 countries? Evidence from ADL threshold cointegration test," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(6), pages 2549-2557, November.
    3. Khan, Najib, 2022. "How Do Middle-Income Countries Fare Under an Inflation Targeting Regime," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 47(4), pages 79-98, December.
    4. Hüseyin Şen & Ayşe Kaya & Savaş Kaptan & Metehan Cömert, 2019. "Interest rates, inflation, and exchange rates in fragile EMEs: A fresh look at the long-run interrelationships," Working Papers halshs-02095652, HAL.
    5. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    6. Fatemeh Razmi & Azali Mohamed & Lee Chin & Muzafar Shah Habibullah, 2015. "The Role of Monetary Policy in Macroeconomic Volatility of Association of Southeast Asian Nations-4 Countries against Oil Price Shock over Time," International Journal of Energy Economics and Policy, Econjournals, vol. 5(3), pages 731-737.
    7. Andrew Phiri, 2023. "Fisher’s hypothesis in time–frequency space: a premier using South Africa as a case study," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(5), pages 4255-4284, October.
    8. Razmi, Fatemeh & Azali, M. & Chin, Lee & Shah Habibullah, Muzafar, 2016. "The role of monetary transmission channels in transmitting oil price shocks to prices in ASEAN-4 countries during pre- and post-global financial crisis," Energy, Elsevier, vol. 101(C), pages 581-591.
    9. Tomáš Urbanovský, 2017. "Granger Causalities Between Interest Rate, Price Level, Money Supply and Real Gdp in the Czech Republic," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(2), pages 745-757.
    10. Bilal Raza & Khurram S Mughal, 2022. "Fiscal Determinants of Inflation in Pakistan," SBP Working Paper Series 108, State Bank of Pakistan, Research Department.
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    12. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.

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    More about this item

    Keywords

    Inflation targeting; Fisher effect; Term structure of interest rates; Cointegration with breaks; Exogeneity test;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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