The Impact of Interest Rates on Inflation: A Case Study of the Turkish Economy

This study investigates how the interest rate affects the rate of inflation in Turkey, one of the most central focuses of economic analysis over these years. Among these analyses is the famous Fisher hypothesis, which assumes a direct relationship between nominal interest rates and expectations of inflation. It uses data from 1989 to 2019 in estimating the relationship between interest rates and inflation using an autoregressive distributed lag model. The empirical results indicate that the interest rates and inflation are negatively related in both short-run and long-run dynamics. These findings represent a great amalgamation of monetarist economic theory, which held that inflation could be curtailed through monetary policy adjustments, namely the raising of interest rates. The lengthiness of the time series and the inclusion of some very significant control variables make this analysis unique compared to other analyses on the subject. Apart from this, the study contributes to policy discussions and carries important lessons for policymakers in Turkey and also for other nations whose inflation problems persist. The research emphasizes that proper monetary policy is the main determinant of inflation stabilization and thus constitutes a timely and relevant contribution to various ongoing debates on strategies of inflation control.