The Inflation-Interest Rate Relationship In The Turkish Economy: Evidence of Cointegration And Granger Causality

This study examines the relationship between inflation and interest rates in Türkiye using monthly data from 2012M01 to 2024M12. Lee-Strazizich's results show that the series are sensitive to various structural break points. This result indicates that structural changes caused by economic shocks affect the Turkish economy. The results of the Engle-Granger, Phillips-Ouliaris, and Johansen tests based on the VECM show long-run relationships among the variables. Moreover, there is a significant positive correlation between interest rates and inflation, as shown by the cointegration coefficients of FMOLS, DOLS, and CCR. VECM-based Granger results show the causal relationship between inflation and interest rates in the short run. This study contributes to the literature by demonstrating a two-way relation between long-term inflation and interest rates. Depending on the breakdown of the differentials, interest rates have little impact on inflation. The research findings indicate that inflation is the root cause of the economy’s problems. Therefore, to resolve economic problems and ensure sustainable stability, the emphasis should be on combating inflation, and coordination between monetary and fiscal policies should be ensured.