Inflation-driven Economy Policy in the Light of the Exchange Rate and the Interest Rate on RGDP in Turkey

This study investigates the reflections on the trio of exchange rate, nominal interest rate and inflation, on Turkey’s Real Gross Domestic Product (RGDP). In the analysis using annual time series data covering the years 1985–2020 obtained from the Turkish Statistical Institute, the Vector Autoregression (VAR) and Nonlinear Autoregressive Distribution Lag (NARDL) models are used with restricted variables. The existence of cointegration also encourages the application of the Vector Error Correction (VECM) model to examine the causal relationships between these variables. Nonlinear ARDL test results and other tests reveal some long-term effects. Research results show that inflation-based growth does not occur in the short term and negatively affects growth in the long term. Due to Turkey’s significant current account deficit and heavy reliance on imported energy and inputs, currency devaluation is ineffective in boosting exports, highlighting the challenges of promoting export growth under these economic conditions. Moreover, it turns out that policies that reduce interest rates, as well as the depreciation of the Turkish lira against the exchange rate due to inflation, harm the economy in general. These effects serve as a crucial wake-up call for proponents of the export-led growth model.