Analysis of the inflation-interest relationship within the framework of Neo-Fisherian approach: An application on Turkey

The casualty relationship between interest and inflation, which has been discussed in the economic literature since the 1700s, was questioned again as the inflation did not come to the levels that are desired although the central banks of the developed countries-especially Fed, ECB, Japan central banks decreased the policy interest rates to zero band in order to get rid of the economic stagnation they had after the 2008 global financial crisis. The interest –inflation relationship, first formulated in 1930 by Irving Fisher, is called as Fisher Parity in literature. Infact this Formula states that nominal interest rates and expected inflation move together, and that the total of real interest rates and expected inflation rates is equal to the nominal interest rate.The Fisher Effect, which is based on the existence of a positive relationship from the inflation rate to the interest rate, has been reconsidered and the studies ,which were conducted, (such as Cochrane 2016, Bullard 2015, Williamson 2016, Uribe 2017), revealed a causality relationship from interest rate to inflation especially in short-term relationships between the two variables,This reserve causality relationship in question has got into the literatüre as the Neo-Fisher Effect and is based on the models of the New Keynesian. This thesis is to study whether the Neo-Fisher Effect, which is recognized after some studies held in developed countries such as USA, Japan and Canada, will be recognized in a developing country such as Turkey. In the application of the econometric model of the thesis, the effects of long-term permanent interest shocks and monetary shocks on inflation and nominal interest rates are studied. Assuming that long-term persistent high interest rate shocks may increase inflation expectations and the Neo-Fisher Effect will be recognized especially in the long term in Turkey. ARDL model was applied making ADF and PP unit root tests and LM unit root test with structural break the ARDL model and causal relationship between variables were studied. Our findings suggest that the Fisher effect is recognized in Turkey in the short term. In other words, the relationship between CBRT policy rate and inflation is negative. In this case, the CBRT can steer inflation with the policy rate. It also is increases in inflation a permanent interest rate shock in Turkey, a long-time high of stay of interest, with the increase of high inflation expectations also strengthens the inflation inertia and that, in fact, despite the current non-Neo-Fisher effect in the short term, the long-term current of Neo-Fisher effect for Turkey can be recognized as possible. Key Words: Neo-Fisher Effect, Monetary Policiy, Taylor Rule, ARDL Bound Testing Approach, Turkey.