The interest rate-inflation relationship under an inflation targeting regime: The case of Turkey

Köse N., Emirmahmutoglu F., Aksoy S.

JOURNAL OF ASIAN ECONOMICS, vol.23, no.4, pp.476-485, 2012 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Volume: 23 Issue: 4
  • Publication Date: 2012
  • Doi Number: 10.1016/j.asieco.2012.03.001
  • Page Numbers: pp.476-485
  • Keywords: Inflation targeting, Fisher effect, Term structure of interest rates, Cointegration with breaks, Exogeneity test
  • Ankara Haci Bayram Veli University Affiliated: No


This paper examines the relationship between nominal interest rates and the expected inflation rate for the Turkish economy between 2002 and 2009, a period when the inflation-targeting regime was implemented as monetary policy. We use the test of cointegrating rank with a trend-break (a method introduced by Inoue, 1999) and we also apply exogeneity tests. Empirical findings indicate that monetary policy rates depend on inflationary expectations; long-term interest rates are affected by monetary policy; and the weak form of the Fisher effect is valid. This evidence implies that monetary policy has actually influenced the real long-term interest rates; the inflation targeting regime pursued by the Central Bank of Turkey is reliable; and hence realized inflation has remained close to its targeted level. (C) 2012 Elsevier Inc. All rights reserved.