Enflasyon belirsizliği ile faiz oranları arasındaki ilişki hakkındaki iki çalışma ve dış ülkelerin gelirlerinin küçük ve açık ülke ekonomisi üzerine etkileri

ABSTRACTTWO ESSAYS ON THE LINK BETWEEN INFLATION UNCERTAINTY ANDINTEREST RATES AND EFFECT OF FOREIGN INCOME ON ECONOMICPERFORMANCE OF A SMALL-OPEN ECONOMYKılınç, ZübeyirMaster of EconomicsSupervisor: Asst. Prof. Ümit ÖzlaleJune, 2005This study includes two studies on the relationship between inflationuncertainty and interest rates and examines the effects of foreign income oneconomic performance of a small open economy. In the literature, there is noconsensus about the direction of the effects of inflation uncertainty on interest rates.The second chapter of this study states that such a result may stem fromdifferentiation in the sources of the uncertainties and analyzes the effects ofdifferent types of inflation uncertainty on a set of interest rates for the UK withininterest rate rule framework. Three types of inflation uncertainties-impulseuncertainty, structural uncertainty and steady-state uncertainty-are derived byusing a time-varying parameter model with a Generalized AutoregressiveConditional Heteroskedasticity specification. It is shown that the impulseuncertainty is positively and the structural uncertainty is negatively correlated withthe interest rates. Moreover, these two uncertainties are important to explain short-term interest rates for the period of inflation targeting era. However, this time, theimpulse uncertainty is negatively and the structural uncertainty is positivelycorrelated with the overnight interbank interest rates, which is consistent with thegeneral characteristic of the inflation targeting regimes. The evidence concerningthe effect of the steady state inflation uncertainty on interest rates is not conclusive.The third chapter uses the same methodology of the second chapter and calculatesthe effects of those three types of inflation uncertainties on interest rate spreads. It isfound that both the structural and steady-state inflation uncertainties increaseinterest rate spreads, while the empirical evidence for the impulse uncertainty is notconclusive. Finally, the last chapter examines how the changes in a large foreigneconomy affect the economic performance of a small country. It finds the values ofeffects by calculating impulse response functions of the domestic economy andconfidence intervals for those functions. Turkey is chosen as the domestic economyand Germany, the US, and the industrial countries are used as proxies for the largeeconomy. The results state that a positive shock in the foreign economy positivelyaffects domestic economy, increases the inflation rates, and appreciates the realexchange rate.Keywords: Interest Rates, Inflation Uncertainty, GARCH, Kalman Filter,International Transmission, Small-Open Economy, StructuralVAR.