The effect of interest and exchange rate on inflation

The recent economic fluctuations in Turkey have sparked numerous discussions. Over the past decade in Turkey, debates have focused on how interest rates, inflation rates, and exchange rates, which are fundamental components of national economies, influence each other. The statement "Interest is the cause, inflation is the result" made by the then Prime Minister in 2014 initiated these debates. Following this claim, inflation remained in single digits from 2014 to 2017, and interest rates were similarly low from 2014 to 2018. The Turkish Lira to US Dollar exchange rate reached double digits later than the other two parameters.Before 2017, inflation rates ranged between 6% and 9%, but by February 2017, they had reached double digits and rose above 20% by the second quarter of 2018. During this period, interest rates were around 8% until the first half of 2018, but increased to double digits by the third quarter, reaching 24%, a threefold rise. The 2018 Priest Brunson incident marked a critical point for the TL/USD exchange rate. Following this event, the exchange rate increased by an average of 0.52 TL per month, reaching double digits by November 2021. A decade after the then Prime Minister's 2014 claim, the exchange rate has increased by approximately 1800%, and inflation and interest rates have risen by about 800%. This study examines whether interest rates were the primary reason for the inflation increase during the period from January 2014 to May 2024. The empirical study utilized ARDL, DFGLS, KPSS, and Philips Perron unit root tests, followed by an OLS test to determine the relationship between these parameters. Keywords: Inflation, exchange rate, interest