Istanbul Gelisim University - A new approach to the inflation-interest rate debate

A new approach to the inflation-interest rate debate

Istanbul Gelisim University Assist. Prof. Dr. Gülgün Çiğdem has brought a new dimension to the harsh debate between economists and politicians about the relation of inflation and interest rate nowadays where the independence of Central Banks is questioned and the recessionist process is discussed with her empirical study published in the US.

Pointing out that the debate about the relation between inflation and interest and which is the cause, which is the result began in the 1700’s, Assist. Prof. Dr. Gülgün Çiğdem from Istanbul Gelisim University said: “These debates are thought to started with Fisher in 1930. Although Fisher formulated the relation between these two macro-economic variables and brought them to the science world with naming it the Fisher Effect, these debates actually started with William Douglas in 1730.”

Çiğdem continued her speech as follows:

“These debates, which have been going on since the 1700’s in the science world, bring about various experimental studies. As a result of the studies, no consensus could be reached among scientists and even different results were obtained. While some of the studies showed that there is a relation between inflation and interest, some could not find any connection. Yet, while some studies have determined that inflation is a cause, interest is a result, others have confirmed the opposite.”

HOW CAN THE PARADOX BETWEEN INFLATION AND INTEREST BE SOLVED?

Conducting an experimental study on the Weighted Average Cost of Funding data from the Central Bank of the Republic of Turkey and CPI figures concerning Turkey's January 2011 - June 2019 period, Assist. Prof. Dr. Gülgün Çiğdem found a two-way correlation between inflation and interest rate, different from other studies in the scientific world with her results of the analysis. The study of Assist. Prof. Dr. Çiğdem, who promotes the idea that “not only inflation is the cause of interest but also interest is the cause of inflation”, published Research in Applied Economics in the US by Macrothink Institute.

Assist. Prof. Dr. Çiğdem said: “It will be important for the economy to maintain an interest rate that does not create inflation and an inflation level that will not raise interest rates. Well, what should be the inflation rate will raise interest rates in Turkey and the interest rate that does not cause inflation? Studies to solve this paradox between inflation and interest will be important for the Central Bank and policy makers.”