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

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  • Ercan Özen
  • Letife Özdemir
  • Simon Grima

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). JEL Codes - F31; O24; E4; E31; E43; P24; P44

Suggested Citation

  • Ercan Özen & Letife Özdemir & Simon Grima, 2020. "The Relationship between the Exchange Rate, Interest Rate and Inflation: The Case of Turkey," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67(2), pages 259-275, March.
    • Handle: RePEc:aic:saebjn:v:67:y:2020:i:2:p:259-275:n:14
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    References listed on IDEAS

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    Cited by:

    1. Moumita Basu & Rilina Basu & Ranjanendra Narayan Nag, 2024. "Inflation Adjustment, Endogenous Risk Premium and Exchange Rate: A Theoretical Analysis," Foreign Trade Review, , vol. 59(2), pages 225-251, May.

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    More about this item

    Keywords

    Turkey; Foreign Exchange; Interest rate; Inflation; Fisher Effect;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • 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
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation
    • P44 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - National Income, Product, and Expenditure; Money; Inflation

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