Perspectives on High Real Interest Rates in Turkey

34 Pages Posted: 27 Oct 2008

See all articles by Prakash Kannan

Prakash Kannan

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2008

Abstract

High real interest rates have historically been a prominent feature of the Turkish economic landscape. This paper attempts to shed some light on this phenomenon. We find that explanations based on fundamental considerations, such as high growth rates or high returns to capital, do not provide a satisfactory resolution of this puzzle. Instead, we find that two other factors - doubts about the sustainability of disinflation and the existence of a risk premium - have a significant impact on the level of real interest rates in Turkey. Importantly, fiscal policy variables are shown to affect both the credibility of disinflation as well as the level of the risk premium, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.

Keywords: Turkey, Real Interest Rates, Marginal Product of Capital, Risk Premium

Suggested Citation

Kannan, Prakash, Perspectives on High Real Interest Rates in Turkey (October 1, 2008). Available at SSRN: https://ssrn.com/abstract=1290769 or http://dx.doi.org/10.2139/ssrn.1290769

Prakash Kannan (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
(202)623-8806 (Phone)

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