THE CASUAL RELATIONSHIP BETWEEN INFLATION UNCERTAINTY AND INTEREST RATE IN TURKEY: ROLLING WINDOW CAUSALITY TEST

The aim of this study is to analyse the impact of inflation uncertainty on the volatility of benchmark interest rate which is the market indicator. In this context, the interest rate of two-year government bonds, which shows general interest rate in the economy and which occurs as a result of the preferences of decision-making units in the money market is considered as a basic variable. Inflation uncertainty is derived from Consumer Price Index (CPI) depending on Friedman’s Approach and is used as an explanatory variable. Because the use of benchmark interest rate includes the knowledge regarding the behaviour of the market decision-making units to inflation and inflation uncertainty, the results obtained are of great importance with regards to the policy proposals. In this study, the effect of inflation uncertainty on the volatility of benchmark interest rate is examined by the volatility and structural break models for the period of 2005:M4-2016:M11. The findings of the study have shown that there is a causal relationship from inflation uncertainty to interest rates between 2005:4 and 2006:5. Additionally, a causal relation from interest rates to inflation uncertainty is observed in the periods of 2013:3 and 2015:12-2016:9