The impact of foreign interest rate on the macroeconomic performance of Turkey

In this study, we examine the effects of a shock in foreign interest rate on the macroeconomic performance of Turkey. We use two different structural vector autoregression models (SVAR) and specify them differently for the pre and post 2001:6 period. Based on the results of the SVAR models we conclude that, for the period before 2001:6 a positive foreign interest rate shock appreciates the real exchange rate, decreases the inflation rate, the domestic interest rate and the income. This last effect occurs when the domestic interest rates are excluded from the model, but when they are included the effect on income is positive. After 2001:6, we find that the real exchange rate depreciates, the income decreases, the inflation rate, and the domestic interest rate increases; although this last effect is very small.