Non-parametric analysis of the relationship between inflation and interest rate in the context of Fisher effect for Turkish economy

Abstract

ABSTRACT Inflation is an increase in the general level of prices which indicates a decrease in the purchasing power of households and a decrease in their real income. The level of interest rates in an economy plays an important role in entrepreneurs’ investment decisions. The Fisher Effect is known as a positive relation between the inflation rate and interest rates, with causality running from inflation rates to interest rates. However, the results of research in the economics literature conducted with different countries and methods on the Fisher Effect have differences. In recent years, linearity methods have been abandoned to examine asymmetric relationships between variables, and nonlinear methods have gained importance. In this study, the relationship between interest rates and inflation in the Turkish economy is examined with nonlinear Granger Causality Analysis in the context of Fisher Effect using monthly data. As a result of the study, a unidirectional causal relationship is detected from inflation to interest rates for the Turkish economy. Also, the Fisher hypothesis is found to be valid for Turkey.