Term structure of interest rates and its macroeconomic determinants in Turkey

The aim of this study is to reveal the term structure of interest rates and to determine the macroeconomic variables affecting the term structure in Turkey. The term structure of interest rates is analyzed through the yield curve. Yield curve analysis provides information about inflation expectations and prediction of interest rate. In order to estimate the yield curve, the most commonly used yield curve estimation methods in the literature, Nelson-Siegel and Svensson which is the extended form of Nelson-Siegel, are used in the study. In the period of 2003 (January) and 2018 (May), the interest rates of state debt securities (Treasury bill) in the various periods of maturity are used which are defined as the risk-free interest rates in Turkey. After estimating the yield curve, the macroeconomic determinants of term structure of interest rates in Turkey are analysed. In this context, the parameters obtained from the Svensson yield curve are included along with macroeconomic variables in the analysis. The analysis is carried out with the Threshold VAR technique which is a nonlinear method. The TVAR technique determines two different regimes by taking into account the detected threshold value for the threshold variable. The findings of impulse-response functions and variance decomposition are reported for both regimes. According to the findings of the study, the level parameter of the yield curve is determined by the inflation variable, and the slope parameter is determined by the output gap. The common determinants of the curvature 1 and curvature 2 parameters are the CDS variable. Besides curvature 1 is affected by the output gap, while curvature 2 is also affected by the inflation. However, the relationship between the yield curve and macroeconomy weakens in the upper regime. The differentiation between the regimes shows that the term structure of interest rates is affected asymmetrically by macroeconomic variables in Turkey. Asymmetric impact of macroeconomic determinants of the yield curve shows that the term structure of interest rates is generally determined by external shocks in Turkey. For this reason, policy makers should make decisions strengthening the yield curve-macroeconomy linkage. It is recommended to adjust monetary and fiscal policies, to increase central bank credibility, and to implement an effective exchange rate policy without compromising the flexible exchange rate regime. In addition, CBRT should internalize emerging shocks instantaneously and estimate a real-time yield curve. Keywords: Term Structure Of Interest Rates, Yield Curve, Threshold VAR.