Is There a Chicken-and-Egg Relationship Between Interest and Inflation Rates for the Turkish Case?

Abstract

There is still a hot debate about the causal relationship between interest and inflation rates. On the one hand, through Fisher Effect, it is expected that inflation is the cause while the interest rate is the result. On the other hand, among policymakers in Türkiye, it is expected opposite as inflation is the result and interest rate is the cause since it is argued that inflation is the result mostly stemming from the high-interest rates constituting the high cost of the credits. However, it is strongly argued that low interest rates—which the government has lowered below inflation—rather than high interest rates are the real cause in the Turkish case. In this regard, the key purpose of the paper is to investigate the causal relationship between the interest and inflation rates for the Turkish case for the period of 2004M01-2022M03. The findings reveal that there is a bi-directional Granger causality relationship between the interest rate and the inflation rate for the Turkish case for the relevant period. This result promotes the chicken-and-egg relationship between interest and inflation rates.