IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/08-251.html
   My bibliography  Save this paper

Perspectives on High Real Interest Rates in Turkey

Author

Listed:
  • Prakash Kannan

Abstract

The Turkish economy is typically characterized as having particularly high real interest rates. Fundamental considerations, such as high growth rates or high returns to capital, do not provide a satisfactory resolution of this puzzle. Instead, we find that two other factors- doubts about the sustainability of disinflation and the existence of a risk premium-have a significant impact on the level of real interest rates in Turkey. Importantly, fiscal policy variables are shown to affect both these factors, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.

Suggested Citation

  • Prakash Kannan, 2008. "Perspectives on High Real Interest Rates in Turkey," IMF Working Papers 08/251, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:08/251
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=22433
    Download Restriction: no

    References listed on IDEAS

    as
    1. Lorenzo Giorgianni, 1997. "Foreign Exchange Risk Premium; Does Fiscal Policy Matter? Evidence From Italian Data," IMF Working Papers 97/39, International Monetary Fund.
    2. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741 Elsevier.
    3. Martin D. D. Evans, 1998. "Real Rates, Expected Inflation, and Inflation Risk Premia," Journal of Finance, American Finance Association, vol. 53(1), pages 187-218, February.
    4. Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters,in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
    5. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    6. Kenneth A. Froot & Jeffrey A. Frankel, 1989. "Forward Discount Bias: Is it an Exchange Risk Premium?," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 139-161.
    7. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    8. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc.
    9. Hodrick, Robert J. & Srivastava, Sanjay, 1986. "The covariation of risk premiums and expected future spot exchange rates," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages 5-21, March.
    10. Kaminsky, Graciela L. & Leiderman, Leonardo, 1998. "High real interest rates in the aftermath of disinflation: is it a lack of credibility?," Journal of Development Economics, Elsevier, vol. 55(1), pages 191-214, February.
    11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    12. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-636, September.
    13. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    14. Carlo Ambrogio Favero & Francesco Giavazzi, "undated". "Why are Brazil´s Interest Rates so High?," Working Papers 224, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    15. Krasker, William S., 1980. "The `peso problem' in testing the efficiency of forward exchange markets," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 269-276, April.
    16. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
    17. Longworth, David, 1981. "Testing the Efficiency of the Canadian-U.S. Exchange Market under the Assumption of no Risk Premium," Journal of Finance, American Finance Association, vol. 36(1), pages 43-49, March.
    18. Hakan Berument & Kamuran Malatyali, 1999. "Determinants of interest rates in Turkey," Discussion Papers 9902, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    19. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    20. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 535-568.
    21. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1484-1515.
    22. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    23. Hakan Berument & Asli Günay, 2003. "Exchange Rate Risk and Interest Rate: A Case Study for Turkey," Open Economies Review, Springer, vol. 14(1), pages 19-27, January.
    24. Erdem Basci, 2002. "Bond Premium in Turkey," Working Papers 0207, Department of Economics, Bilkent University.
    25. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
    26. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    27. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    28. Bilson, John F O, 1981. "The "Speculative Efficiency" Hypothesis," The Journal of Business, University of Chicago Press, vol. 54(3), pages 435-451, July.
    29. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
    30. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    31. Erdem Basçi & Mehmet Fatih Ekinci, 2005. "Bond Premium in Turkey : Inflation Risk or Default Risk?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 41(2), pages 25-40, March.
    32. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    33. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280-280.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dani Rodrik, 2012. "The Turkish Economy after the Global Financial Crisis," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(1), pages 41-61, January.
    2. Mihai Macovei, 2009. "Growth and economic crises in Turkey: leaving behind a turbulent past?," European Economy - Economic Papers 2008 - 2015 386, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Dani Rodrik, 2009. "The Turkish Economy After The Crisis," Working Papers 2009/9, Turkish Economic Association.
    4. Caroline Van Rijckeghem, 2010. "Determinants of Private Saving in Turkey: An Update," Working Papers 2010/04, Bogazici University, Department of Economics.
    5. World Bank, 2014. "Turkey Public Finance Review : Turkey in Transition--Time for a Fiscal Policy Pivot?," World Bank Other Operational Studies 19321, The World Bank.
    6. Tais Carestiato Da Silva & Helder Ferreira De Mendonça, 2011. "Setting The Interest Rate For Twooutlier Countries," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 207, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

    More about this item

    Keywords

    Disinflation; Economic models; Foreign exchange; Fiscal policy; Real interest rates; Risk premium; Turkey; inflation; real rates; real interest rate; Marginal Product of Capital;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:08/251. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi). General contact details of provider: http://edirc.repec.org/data/imfffus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.