The Validity of The Neo-Fisher Effect in The Period of Explicit Inflation Targeting: An Econometric Analysis on Turkey

Sevda Yapraklı ()
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Sevda Yapraklı: Atatürk Üniversitesi, İktisadi ve İdari Bilimler Fakültesi, İktisat Bölümü, Erzurum, Türkiye.

EKOIST Journal of Econometrics and Statistics, 2022, vol. 0, issue 37, 85-105

Abstract: Interest and inflation rates are two critical variables concerning monetary policy strategies in the form of explicit Inflation Targeting (IT) to ensure price stability. Traditionally, nominal interest rates are raised, and inflation rates are reduced to explicit IT’s target values; however, through discussions on Neo-Classical and Neo-Keynesian views, the traditional Fisher Effect has come under scrutiny. This study econometrically examines the relationship and direction of flow between nominal interest and inflation. This study contributes to the literature by providing a unique view of the open IT period, data set, and analysis method, using data regarding interest rates on government domestic debt securities and consumer price index variables from January 2006 to August 2021, when Turkey applied the explicit IT. This study uses econometric methods, such as unit root (Ng–Perron), multiple structural breaks (Bai– Perron), and cointegration (Johansen) tests, Dynamic OLS regression estimation, and VEC causality analysis. The results indicate that the variables move together in the long run, with causality running from inflation to interest. According to the analysis results, the Neo-Fisher Effect is invalid when explicit IT is applied in Turkey. These findings indicate that savers demand more interest to protect their real earnings as the inflation rate increased in Turkey during the explicit IT period. Based on the analysis results, it would be appropriate to use inflation actively and consider other basic macroeconomic indicators to manage the real value of public debt in Turkey.

Keywords: Structural Break; Dynamic OLS; Fisher/Neo-Fisher Effect; Inflation; Interest Rate (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ist:ekoist:v:0:y:2022:i:37:p:85-105

DOI: 10.26650/ekoist.2022.37.1071062

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