Low Interest Policy and Inflation: An Analysis Based on Turkey in the Frame of Neo-Fisherian Approach

Abstract

This study aimed to analyze whether the political propositions of a Neo-Fisher monetary policy would be valid for the Turkish Economy, and the fact that the interest policies implemented by the CBRT in Turkey are frequently discussed, constitute the main motivation of the study. Based on the basic assumption that long-term permanent interest rate shocks may increase inflation expectations and the Neo-Fisher Effect may be valid in Turkey, unit root tests were conducted by using the data of the Turkish economy covering the 2002-2017 period, and then Autoregressive Distributed Lag Bound Test (ARDL model). The causality relationship between the variables was investigated by using different theoretical models created in the analysis. The results for the first model revealed that the Fisher Effect might be valid in the short run in Turkey. In the second model, it has been found that keeping long-term interest rates high will create an inflationary effect by increasing inflation expectations, and the Neo-Fisher Effect may be valid. Although Neo-Fisherian effects were observed among the variables, it is important to consider the economic situation of Turkey in political conclusions. Therefore, increasing the credibility of the CBRT and focusing on financial stability should be provided rather than a Neo-Fisher policy implementation.