The relationship between inflation and interest rate: The case of Turkey

The Fisher hypothesis suggests a positive relationship between nominal interest rate and inflation rate in the long run. In this study, the validity of the Fisher's hypothesis was investigated in both strong and weak form for Turkish economy. For this purpose, long-run relationship between consumer price inflation and interest rates on deposits of various maturities was examined using monthly data set for the period from March 2007 to October 2019. The long-run relationship between the series was tested using Pesaran et al. (2001) co-integration approach. In this study, short-run dynamics are revealed within the framework of error correction mechanism. In order to test the Fisher's hypothesis in strong form, it was examined whether real interest rates contain unit root or not. According to the findings obtained from this study, there is a long-run balance relationship between consumer price inflation and deposit interest rates. 1-month, 3-month, 6-month and 12-month deposit interest rates have a long-run relationship with consumer price inflation, which confirms the weak form Fisher hypothesis. In addition, the findings show that strong form of the Fisher hypothesis is not valid in Turkey for the period of 2007:03-2019:09. Key Words: Inflation, Nominal Interest Rate, Fisher Hypothesis, Turkey