The Validity of the Fisher Effect in the Inflation and Disinflation Process: Evidence from the Fourier Cointegration Test for Turkey

This study investigates the validity of the Fisher effect in the Turkish economy. The theory, which is based on the co-movement of inflation expectations with nominal interest rates, is used as a policy tool to monitor monetary policy feedback in the inflation targeting strategy. Accordingly, the validity of the Fisher effect for the recent inflationary pressures and disinflation process (Fisher effect puzzle) will provide feedback for policy effectiveness and future policies. The relationship between inflation and the nominal interest rate is estimated with the Fourier function cointegration test in two models: the disinflationary period (2006Q1:2024Q4) and the inflationary period without disinflation (2006Q1:2022Q3), and the validity of the Fisher effect is supported. While the Fisher effect coefficient is calculated as 0.29 for the disinflationary period (Model 1), the Fisher effect coefficient is calculated as 1.14 for the inflationary period (Model 2). The determinant of inflation expectations on nominal interest rates during the disinflation process is still valid, but it is quite limited. On the other hand, nominal interest rates were determined by inflation expectations during the inflationary period. The empirical findings of this structure, which is defined as the Fisher effect puzzle and where the Fisher effect is realized with different coefficients in inflation and disinflation processes, provide important information for policymakers in terms of the disinflation process and inflation targeting strategy. In this context, the findings support that breaking the inertia in inflation expectations is as important as monetary tightening for policy effectiveness in the disinflation process in the Turkish economy. Therefore, the stability of Central Bank policies plays a key role in the success of the inflation targeting strategy. The coefficients obtained from the models that take into account the inflation and disinflation process are a new contribution to the empirical literature in the context of the Fisher effect puzzle.