ANALYSIS OF THE RELATIONSHIP BETWEEN INFLATION AND CENTRAL BANK INTEREST RATES IN TURKEY: FOURIER APPROACH

Abstract

Within the framework of inflation targeting program officially implemented since 2006, the primary objective of the Central Bank of Republic of Turkey is to achieve and maintain price stability. As a result of instrumental independence, the CBRT determines, at its own discretion, the monetary policy it would implement and the policy instruments it would use in achieving and maintaining price stability. In this context, The CBRT uses a policy mix including one-week repo rate, the interest rate corridor between O/N borrowing and lending rates as well as reserve requirements to achieve price stability and to provide financial stability with regard to controlling of financial risks which have the potential to threat price stability. The aim of this study is to investigate the longterm relationship between the O/N repo rates to approximate central bank interest rates and the consumer price index to approximate inflation during the period of 2005-2017. Using monthly data, the Fourier Granger Causality Test is employed to test the relationship between O/N repo rates and CPI. The findings indicate that there is a oneway causality relationship from O/N repo rates to CPI.