Determinants of Interest Rates in Turkey

This paper analyzes the Turkish Treasury interest rate behaviour within the Fisher hypothesis framework for the period from 1988:11 to 1998:6. Consistent with the hypothesis, empirical evidence indicates that the interest rates increase with expected inflation. After the risk is controlled, the paper suggests that interest rates increase less than expected inflation; that is, real interest rates decrease with higher inflation. Moreover, inflation risk increases interest rates and decreases the maturity of government debt: This is evidence that lenders prefer shorter maturity in order to hedge themselves in a setting where the debt burden on the budget is on the rise. This may also indicate that both the interest rates and maturity of the debt are used as policy tools by the Treasury rather than as state variables