Perspectives on High Real Interest Rates in Turkey
33 Pages Posted: 18 Dec 2008
Date Written: October 2008
The Turkish economy is typically characterized as having particularly high real interest rates. 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 these factors, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.
Keywords: Interest rates, Turkey, Risk premium, Disinflation, Fiscal policy, Foreign exchange, Capital, Economic models
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