The interaction of interest rates, inflation, exchange rates and economic growth in Turkey: 2000 - 2021

The effects of interest rates on real output and the general price level are studied by using VAR and SVAR models for Turkey. The economic theories and methodology on the subject were discussed extensively and 5 variables were used for analysis; for the 2000 Q1 - 2021 Q4 period, quarterly data of deposit rate as interest rate, real effective exchange rate, current account, CPI that represents inflation, and real GDP that represents growth. It is found that the short-term interest rate as the prominent monetary policy instrument, has impacts on real macroeconomic variables, inflation, and growth, by affecting the real exchange rate. While the effect on GDP emerges with a lag, its impact on inflation is in form of a little shock. Therefore, it was concluded that inflation in Turkey requires strict and consistent intervention. Keywords: Interest Rates, Reel Exchange Rate, Real GDP, CPI