Nonlinear Relationships Between Inflation, Interest, and Exchange Rates in Türkiye: A Fourier-Based Approach

This study examines the long-term relationships among Türkiye's inflation, interest, and exchange rates, using Fourier-based econometric techniques to account for structural breaks and non-linear trends. Traditional methods often fail to capture the complexities of emerging market economies with high volatility, such as Türkiye, where external shocks and structural shifts play a significant role. We apply the Fourier Augmented Dickey-Fuller and Johansen-Fourier cointegration tests to address these dynamics, enabling a nuanced analysis of Türkiye’s economic variables. Our findings reveal a strong, positive long-term relationship between exchange rates and inflation, highlighting the critical impact of currency fluctuations on domestic price levels. In contrast, interest rates show a weaker direct influence on inflation, suggesting that while monetary policy adjustments are necessary, they may be insufficient to control inflation in Türkiye. Cointegration regression analyses using FMOLS, DOLS, and CCR methods further support these relationships, indicating the need for exchange rate stabilization policies to mitigate inflationary pressures. This study contributes to the literature by applying Fourier-based methods, which provide a more flexible and accurate model for understanding Türkiye’s economic structure. The results offer valuable insights for policymakers in Türkiye and other emerging markets where external dependencies amplify inflation risks, underscoring the importance of integrated policy approaches for achieving long-term economic stability.