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Nonlinear and Complex Dynamics pp 269–294Cite as

Can Term Structure of Interest Rate Predict Inflation and Real Economic Activity: Nonlinear Evidence from Turkey?

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Abstract

This study investigates whether the term structure of interest rates contains useful information about future real economic activity and inflation in Turkey during the 1991:7–2004:3 periods. In order to analyse these relationships, we have employed the Generalized Impulse Response (GIRF) analysis to the Logistic Smooth Transition Vector Autoregressive model. We have determined that the results of a GIRF analysis are consistent with the recursive Chow test and parameter stability tests. Besides, we have found out that the relationships between spread-real economic activity and spread inflation are negative. These negative relationships have also been examined by GIRF analysis; because of a negative reverse relationship between Expectation Hypothesis and Interest Transmission Channel, a negative correlation between real economic activity and spread has occurred. For the inflation and spread relationship, we find a negative Fisher effect and negative Expectation Hypothesis, which cause a negative relationship between these variables. Finally, we have found that Estrella’s (1997) theoretical prediction that “empirical relationships are not structural, and alternative monetary policy regimes could lead to very different outcomes” cannot be proven by the Turkish data.

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Notes

  1. 1.

    For the detailed information about the Turkish economy, [16] can be used.

  2. 2.

    The daily interest rates obtained from ISE are weighted with the transaction volumes to calculate the interest rates for 1-month and 3-month maturities. The 1-month interest rate is defined to have a maturity in the range of 20–40 days and the 3-month interest rate is defined to have a maturity in the range of 80–100 days.

  3. 3.

    In both of the regression equations, we are using different dependent variables; hence, there is no direct comparison of R-squares.

  4. 4.

    Conversely, during the crises the Interest Transmission Channel worked. What could be the cause of this abrupt phenomenon? This question is a subject of a further study.

  5. 5.

    Fifteen months is a very long period for an emerging market which has a high and volatile inflation rate.

  6. 6.

    Output gap is obtained from seasonally adjusted industrial production index which is the deviation from the trend taht is calculated with Hodrick Prescott filter.

  7. 7.

    The nonlinear estimation of the same sample periods of monetary reaction function can be found in [45] and [46].

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  1. Department of Economics, Çankaya University, Ogretmenler Cad. No:14, YY., Balgat, Ankara, Turkey

    Tolga Omay

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Omay, T. (2011). Can Term Structure of Interest Rate Predict Inflation and Real Economic Activity: Nonlinear Evidence from Turkey?. In: Nonlinear and Complex Dynamics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0231-2_22

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  • DOI: https://doi.org/10.1007/978-1-4614-0231-2_22

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