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

Author

Listed:
  • 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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    File URL: http://saeb.feaa.uaic.ro/index.php/saeb/article/view/1168
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    References listed on IDEAS

    as
    1. Ekrem Gul & Aykut Ekinci, 2006. "The Causal Relationship Between Exchange Rates and Inflation in Turkey:1984-2003," Anadolu University Journal of Social Sciences, Anadolu University, vol. 6(1), pages 91-106, June.
    2. Philip Kofi Adom & Kwaku Amakye & Charles Barnor & George Quartey, 2015. "The long-run impact of idiosyncratic and common shocks on industry output in Ghana," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 39(1), pages 17-52, March.
    3. Mohammad Shahbaz, 2009. "A Reassessment of Finance-Growth Nexus for Pakistan: Under the Investigation of FMOLS and DOLS Techniques," The IUP Journal of Applied Economics, IUP Publications, vol. 0(1), pages 65-80, January.
    4. Takayasu Ito, 2009. "Fisher Hypothesis in Japan: Analysis of Long‐term Interest Rates under Different Monetary Policy Regimes," The World Economy, Wiley Blackwell, vol. 32(7), pages 1019-1035, July.
    5. Shady Kholdy & Ahmad Sohrabian, 1990. "Exchange Rates and Prices: Evidence from Granger Causality Tests," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 13(1), pages 71-78, September.
    6. Mika Linden, 1995. "Interest rate and inflation expectations in Finland 1987-1994 : a case for the inverted fisher hypothesis," Finnish Economic Papers, Finnish Economic Association, vol. 8(2), pages 108-115, Autumn.
    7. Hakan Berument & Nildag Basak Ceylan & Hasan Olgun, 2007. "Inflation uncertainty and interest rates: is the Fisher relation universal?," Applied Economics, Taylor & Francis Journals, vol. 39(1), pages 53-68.
    8. Mr. Marco Rossi & Mr. Daniel Leigh, 2002. "Exchange Rate Pass-Through in Turkey," IMF Working Papers 2002/204, International Monetary Fund.
    Full references (including those not matched with items 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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