The Validity of the International Fisher Hypothesis in Turkish Economy: Generalized Method of Moments

Abstract

International Fisher Hypothesis asserts that a change in the inflation rate impacts a positive effect upon the interest rate and thus the national currency would depreciate. In this context, Generalized Method of Moments is applied to test the validity of International Fisher Hypothesis for Turkish economy in the period of 1975-2014. The results of GMM analysis show that one lagged values of interest, inflation and exchange rates, which are instrumental variables, have a positive effect on current and one lagged inflation and exchange rates. Besides, instrumental variables have a negative impact on current and one lagged interest rate, while they have a positive effect on two lagged interest rate and depending on this phenomenon national currency depreciates. The findings of the analysis show that International Fisher Hypothesis is valid for Turkey.