Impact of Short-term Interest Rate on Exchange Rate: The Case of Turkey

Abstract

After the crises in 2001 inflation targeting regime has been adopted and short-term interest rates have been used as the main monetary policy tool in Turkey. In addition, Central Bank of the Republic of Turkey (CBRT) utilizes short-term interest rates against the sudden rises in dollar rate. In this context, we aim to determine the efficient level of short-term interest rates on dollar rate. Accordingly, using monthly data for the period of 2003:02 – 2015:08, we find no evidence that higher interest rates cause to a weakening of exchange rate, by the frequency domain Granger causality test.