The Validity of Fisher Effect Under Inflation Targeting Regime: Empirical Evidence From Turkey

The aim of this paper is to analyze empirically the validity of Fisher effect under inflation targeting regime in Turkey. In this framework, using different interest rates and inflation rate, Johansen cointegration test, error correction model and Granger causality test are done. The empirical results show that Fisher effect is valid for all interest rates in the long-run, and its only valid for Treasury bill rate in the short-run. The validity of Fisher effect in the long-run shows that nominal interest rates moves with expected inflation rates and monetary policy has no affect on real interest rates. Granger causality test with using levels of the variables show that there is causality from inflation rate to discount rate and there is causality from deposit rate and monetary policy rate to inflation rate. Granger causality test with using first differences of the the variables show that there is only causality from deposit rate to inflation rate. The finding of causality from monetary policy rate to inflation rate shows that the central bank could affect inflation using policy interest rate