Abstract
In economic literature there are two different views on the effects of inflation expectations on interest rates, called liquidity effect and Fisher effect. According to the liquidity effect, an increase in inflationist expectations results as a decrease in both nominal and real interest rates. According to the Fisher effect, there is a one-to-one correspondence between a change in inflation expectations and nominal interest rate in the long-run which implies that monetary policy is irrelavant on the real interest rate. Therefore a test of the long run relationship between nominal interest rate and inflation rate is important on understanding the effects of the monetary policy on interest rates. In this study the presence of the Fisher effect is investigated for Turkey under the assumption of adaptive expectations.
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