Causality Relationship between Inflation and Interest Rate

Abstract

The study aims to reveal the causality relationship between inflation and interest rates in general and for G20 countries in particular. In this context, the study analyses the bidirectional relationship between inflation and interest rates using monthly data for the period 2000-2022, using causality methods based on traditional and Fourier functions that capture structural breaks gradually or smoothly. According to the test results of the traditional Granger causality analysis, while there is a bidirectional causality relationship between inflation and real interest rates in the panel data of G-20 countries, causality relationships change when structural breaks based on Fourier functions are taken into account. With the increasing global inflation in recent years, it is considered important for central banks aiming for price stability to take into account the changing relationship between inflation and interest rates.