The relationship between exchange rate, inflation, and interest rate in Turkey: Causality analysis

The recent foreign currencies against the Turkish Lira in Turkey has increased the exchange rates and the general level of prices. In order to stabilize this rise, interest rates have been used to control the exchange rate and the general level of prices. Changes in exchange rates affect many variables, including foreign trade and inflation in developing and open countries like Turkey. The relationship between these variables is economically and politically important because of the role it plays in the determination and effectiveness of economic policies. Therefore, ensuring the stability of inflation, interest rate and exchange rate is the main objective of monetary policy.. This study aims to investigate the relationship between inflation, interest rate and exchange rate and to understand the interaction between these variables and to contribute to the literature as it is one of the current issues for the Turkish economy. In this study, an analysis of the relationship between inflation, interest rate and exchange rate in the Turkish economy is aimed at understanding the interaction of these variables with each other. The effects of inflation, interest rate and foreign exchange on economic stability, the role of policy makers in the decision-making process of Turkey's economy, and the relationship between inflation, interest rate and foreign exchange have been analyzed using monthly data from 2004 to 2024. The Fourier Toda-Yamamoto and Fourier Granger causality tests were employed in the analysis.According to the test results:A bidirectional causality relationship was found between inflation and the exchange rate. A unidirectional causality relationship was identified from the interest rate to the exchange rate.No causality relationship was detected between inflation and the interest rate. Keywords: Inflation, Interest Rate, Exchange Rate.