RELATIONSHIPS BETWEEN CENTRAL BANK POLICY INTEREST RATE AND EXCHANGE RATE: CASE OF TURKEY

Central banks often use interest rate policy tools to reduce exchange rate fluctuations. However, it is debated whether the interest rates affect the exchange rate in the literature. In this study, relationships between the USA dollars exchange rate, EURO exchange rate and central banks’ policy interest rate is examined. Central banks policy interest rate, USA dollar exchange rate and Euro exchange rate are analyzed by econometric methods and by using data covering 2003-2018 years in Turkey. Augmented Dickey Fuller (ADF) Unit root tests is performed to to prevent false correlation and to determine whether the variables are at the same level of stability or not. Then, The Granger Causality Test is applied to determine the causality relationship between the interest rate and Exchange rate. According to the results obtained, it is determined that there is meaningful bidirectional relation between the policy interest rate and the exchange rate. In this context, the findings show that Central bank policy interest rate has been an effective tool to reduce exchange rate fluctuations in Turkey