Interest rate as the last link of chain during crisis

Abstract

AbstractIn the literature, there are studies which conclude that interest rates have either positive or negative effect on exchange rates during financial crises in emerging markets. These results are in accordance with the traditional or revisionist views respectively. However, in the literature, there are also researches which result in interest rates not having influence on exchange rates, signalling that there might be an alternative to these two approaches. In this study, it is investigated whether interest rates can be cause of exchange rates by taking stock market into consideration and using the data of 2001 financial crisis in Turkey. In the analysis, ARDL co‐integration, VECM and Granger causality methods are applied and it is reached that the relationship was from stock market and exchange rates to interest rates, not vice versa.