The Interaction of Interest Rates, Inflation, Exchange Rates and Economic Growth in Turkey: 2000-2021

Abstract

This thesis studies the effects of interest rates on mainly the real output and price level for Turkish economy by using VAR and SVAR models. The study first reviews the literature related to the interest rates, economic growth, price level, exchange rate, and current account interaction, and then examines the Turkish economy for the last 20-year period using quarterly data between the year 2000 and 2021. The study takes the short-term interest rate as the prominent monetary policy instrument variable and searches its’ impacts on some other macroeconomic variables. The variables used for the analysis are; quarterly data of interest rate on deposits, CPI data for inflation, real GDP data for economic growth, real effective exchange rates, and current account balance data. The study finds that monetary policy is an effective policy but interest rate shocks affect the GDP, and create impact on economic growth with a time lag as expected. On the other hand, interest rate and monetary policy is affective on exchange rates and price stability in a form of a little shocks. Therefore, we conclude that authorities should be very careful about implementing monetary policy and using the interest rates as a policy instrument because discreationary monetary policy implementations will easily lead to a price instability in Turkish economy.