High interest rate policy in Turkey and factors influencing interest rate spreads

Abstract

The main purpose of this paper is to examine what factors explain the difference between effective interest rates of Turkey and USA. The paper considers seven variables explaining interest rate spread such as general prices, Gross Domestic Product (GDP), exchange rate, credibility index, level of international reserves, foreign trade deficit, and budget deficit. Four distinct periods were selected to explore the influences of the above mentioned variables on on interest rate spreads in these different time periods. The period covering 1994.1-2006:12 was splitted into three sub-periods: the sub-period covering 1994:1-1998:12, crisis period covering 1999:1-2001:.12, and post-crisis period covering 2002:1-2006.12.            

               Employing the data for Turkey and applying Engle and Granger two-step procedure, this paper concludes that the only variable reducing interest rate spreads in all periods is GDP. The other variables generally increase the interest rate spreads.

Engle and Granger estimation procedure, unit-root test, interest rate spreads, interest rate.