The Relationship Between Interest Rates and Exchange Rates in Türkiye: The DCC-GARCH Approach

Öz

This research investigates the dynamic relationship between interest rates and exchange rates in Türkiye from Jan1 uary 2005 to April 2025, employing the DCC1GARCH(1,1) model. The theoretical framework suggests that interest rates should lead to currency depreciation, but empirical research in emerging markets reveals complex relationships due to changing macroeconomic conditions and declining policy credibility. According to the analysis results, there is a negative relationship between the real interest rate and the exchange rate throughout the period. The correlation between the interest rate and exchange rates varies over time. During the 200512021 period, the correlation coefficient ranged between −0.13 and −0.21. Between 2021 and 2022, this coefficient increased in absolute terms, reaching its highest point throughout the period. The monetary policies and economic growth strategies implemented during this period created a permanent exchange rate and a high inflation environment. As a result, negative real interest rates were observed for a long period. Economic agents tracked changes in the exchange rate through the future real interest rate. The correlation between the variables returned to the same level as the 200512021 period starting from mid12023, thanks to the confidence provided by the changing economic management. The results indicate that the strength of the interest rate1exchange rate relationship in Türkiye depends on the current policy regime and the reliability of monetary management.

Anahtar Kelimeler

• Real interest rate
• Exchange rate
• DCC-GARCH model

Kaynakça

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