Literature Review

Effects of Inflation on Growth in relationship to Exchange Rate Regimes

A study conducted by Andrew Abbott and Glauco De Vita (2011) about “Reexamining the Correlation that exists concerning market increase as well as development: the study on the effects of the ratio of conversion systems,” reveals the connection for expansion and development empirically beneath other ratios of the conversion system. The findings founded on a board of 130 industrialized plus growing nations within a span of 1970-2005, It shows the cost of increase for financial evolution is substantial under the situation of producing countries, also a greater effect on floating ratio of exchange besides being on a stationery system. The Balassa- Samuelson model is used by the author to justify the function of the ratio of conversion on inflation development association theoretically.

The relationship noted with another study is that an increase in economic growth is controlled by higher levels of investment and bigger exports (Abbott, & Glauco, 2011). The international transactions currency (USD) used during export business activities will lead to elevated number of exchange of foreign money into domestic money. While the value of Turkish Lira steadily depreciates, then the employer will use different conversion merit to increase revenues as well as producing more products. As noted from (Abbott, & Glauco, 2011) that investment can as well have an influence on economic growth. The hypothesis is to offer proof of the impact of the decision of a specific ratio of conversion system on the connection between inflation and economic development.

Abbott and Glauco (2011) concluded that inferences from the study are that the implementation of the ratio of exchange in developing countries is highly subjected to the first macroeconomic environments instead of an open rule decision because the plan insinuation of this study is apparent.

Inflation Relationship with Price-Level Targeting

Acuna-Roa, & Parra-Polania, (2016) conducted a research trying to compare price-level targeting (PLT) against inflation targeting (IT) by employing a Keynesian model, with which it exhibits inflation persistence. This means that after their findings there is a partial indexation to lagged inflation. It is deduced that standard variables of the primary factors of the study show that, first, the loss linked to macroeconomic volatility may drop by thirty percent by moving to PLT. Second, a broad range of parameters for the weight shown by the PLT central bank to yield balance allows accomplishing greater levels of welfare. Third, the greater the cost of rigidity the broader the range of which PLT outperforms, although the lesser the health advantage, then lastly on when the level of indexation is higher than sixty percent it becomes better not to move to PLT (Acuna-Roa, & Parra-Polania, 2016).

The crisis and the new challenges affecting monetary policy have led to a re-examination of IT against PLT. Previous literature has indicated that PLT can as well be used to implement IT solution under commitment, and thus, it is understood that credible PLT regime can outperform IT under discretion (Acuna-Roa, & Parra-Polania, 2016). This study has analyzed the performance of PLT against IT, in the field of social well-being, employing a new Keynesian model that consists of partial indexation to lagged inflation.

Foreign Exchange Reserves and Exchange in Turkey

Bayat, Senturk, and Kayhan (2014), performed a study to explore the asymmetrical connection concerning nominal-real exchanges plus external conversion assets of the central bank in Turkey between the periods of 2013-2014. The research welfares from the previous improvement in the nonlinear interval succession econometric exploration, also, it brings out nonlinear cointegration, connection, and regularity dominion connection test. The findings come with robust conclusions of nonlinear cointegration that exists in the exact ratio of exchange plus the central bank external conversion funds.

Empirical deductions of Hansen-Seo (2002) plus the rate of recurrence domain causality outcomes demonstrate no substantial link concerning foreign assets to nominal. Actual rates of conversion, whereas there is unexpected connection coming from nominal and rates of exchange in the market of Turkey as long exchange reserves is maintained (Bayat, Senturk & Kayhan, 2014). Bayat, Senturk and Kayhan (2014), state that nonlinear Granger causality test outcomes show there is a significant association of external conversion assets to nominal and actual rates of conversion.

The data used in the research is monthly information straddling the span for external conversion assets plus the nominal ratio of exchange as well for actual rates of exchange. The hypothesis is to try to find if there is a relationship amongst nonlinear cointegration, non-linear connection and occurrence dominion connection procedures. Drawing conclusions that overall bank of Turkey employs an actual ratio of conversion considering the account framework of increase aiming the system.

Interest Rates and Economic Growth Relationship

Bosworth (2014) conducted a study scripting down its report that annually the panel of representatives for the Old-Age, Survivors and disability insurance (OASDI). Trustee money projects the future economic position of the plans spreading as long as seventy years towards forthcoming. These predictions integrate estimated drifts in both demographic and financial basis, the representatives depend on the previous pushes to anticipate the upcoming, and as well the forecasts of personal features remain highly sovereign to each other. Bosworth (2014), explores his study on long-term determinants of rates of interest, plus, specifically, the association between differences in the ratio of benefits plus rates of financial development. The study question shows whether there is an association, as speculated by standard development model, or is the function of commercial development surpassed by a greater collection of internal as well as external impacts.

Statistics indicate some big markets are employed to show the impact of international rates of interest in a progressively globalized international money economy. A strategy is formulated to balance both extended and small term charges of interest for anticipated increase (Bosworth, 2014). Bosworth research stipulates that money markets are greatly incorporated into the international platform, and it creates slight meaning to model, evaluates or predict rates of interest bounded by the closed-economy outline. Moreover, there is only a feeble connection concerning actual rates of interest plus financial development. Assumed the intricacy of world financial growth, it is improbable that the OASDI forecasts would be advanced by additional official labors to perfect forthcoming rates of premium fees.

National Economic shocks Impacts on Central Banks Interest Rate Decisions

Another article by Bouvet and King (2013) evaluate the significance of a state economic situations for European Central Bank (ECB) rates of premium framework plus whether the economical, as well as independent dues predicament, have made countrywide differences important. Formerly, economic instability in some states can authorize a nonconformity from this law. For instance, employing an actual-time, estimate statistics (Bouvet & King, 2013). Bouvet forecast an improved Taylor rule integrating double macroeconomic state effect strategies, first the variance concerning the intermediate plus the Eurozone strategies of increase as well as actual (GDP) expansion, as well as nonconformities for the procedures on improvement and actual GDP development for the central plus margin nations on Eurozone means. Employing rolling-window evaluation to measure the firmness of value approximations, the proof is deduced that variances in country statistic- particular expansions of the margin- on Eurozone means to show a significant function in the economic plus independent liability problem.

The hypothesis the author stated is to find out whether the state financial situations are reflected in European Central Bank (ECB) rates of premium strategy creation. The data formulated in the study uses a monthly data covering as of February 1998 – July 2012 on agreement Finances as well as ECB (Bouvet & King, 2013).  In conclusion, the study proposes that different financial shocks would adjust the significance of Eurozone interest in the merit of areas facing the tremor – in this situation the margin.

The Rationality of the Fiscal Conversion for Greater National Increase as well as Misalignment in the Long-run Investment

The research on Turkey conducted by Civcir (2004) employs an economic theory upon which Johansen cointegration method scrutinizes the rationality of the ratio of conversion determinations as a description of the Turkey currency relationship with the U.S currency within the period of 1987-2000. A single cointegration scale is established, backing up the description of the model as interpreting a long run balance connection (Civcir, 2004). There are as well evaluations done on weak exogeneity of the nominal ratio of conversion plus financial parameters from the anticipated standard error association models. This enables us to understand the modification steps upon which the long-run balance connection between rates of exchange and financial parameters is retained.

Moreover, the author generates misalignment towards approximating an extended connection so as to examine if Turkey currency had been overrated earlier than the day before 2002 fiscal predicament in Turkey. The hypothesis is identifying the relationship of financial model of exchange ratio determination between the two parameters of nominal exchange rate and a set of financial parameters.  In conclusion, the evaluated misalignment values indicate significant overvaluation before the crisis.

To explain this, it is caused by fluctuations that occur in the exchange rate which is mostly affected by non-economic forces that are very hard to measure (Civcir, 2004). For instance, political and security forces of a nation. Currently, Turkey embraces a total floating exchange rate. Meaning the position of the ratio of conversion is affected by the methods and economic forces. Therefore, the scaling factor of the interest rate by the nation no longer controls the value of the highest in the creation of conversion rate as previously done. In a freely floating conversion system, the law of supply and demand will take its effect. Fluctuations in conversion rate will primarily rely upon request and supply situations in national money distribution in external conversion economy (Civcir, 2004).  Market forces that affect the conversion rate are the difference in the level of inflation and Balance of International Payments.

Proof from Turkey to Indicate Effectiveness in Banking over Economic Liberalization

The study by Denizer, Dinc and Tarimcilar (2007), concerned an evaluation of the investment effectiveness in a pre- as well as the after-deregulation framework that was drawn towards Turkey Republic involvement through employing DEA.  Additionally, the study explores the scale impact on effectiveness. The evidence provided indicates that the deregulation agendas were shadowed by a noticeable decrease in effeteness (Denizer, et al., 2007). Another evidence from the article postulates how Turkish currency exchange scheme possess a vital balance challenge within research span of time. The next section for the evaluation of data depended on econometric strategies and realized that one principal cause for these system-wide effectiveness drops had remained to be an increasing macroeconomic variability on the Turkey’s currency stability in common as well as fiscal division in specific.

Turkish Lira will depreciate when compared to other currencies because of higher inflation rate in the economic market (Denizer et al., 2007). One major reason that contributes to this is the rise of world oil prices back in 2005, which also led the national fuel to increase slowly affecting U.S currency against Turkish currency became weaker (Denizer, et al., 2007). The Purchasing Power Parity (PPP) theory can as well explain the relationship between exchange rate and inflation variables. The argument shows that the ratio of exchange are in a firm position when a nation relies only upon the proportion of the value of products in a nation (Denizer, et al., 2007).

Clearly, there is a positive correlation to inflation. Investors have their unique characteristics in the market in response to differences noted in the interest rates. This means that the investment level will drastically reduce when there is a high-interest rate in the market (Denizer, et al., 2007). Extra demand will have an influence on price increase and inflation because the amount of money in circulation is not stabilized by the productions output offered.

Fixed versus Flexible Exchange Rates

Hoffmann (2006) study explores the theory that shows how a bounded exposed economy stretchy charges of exchange plays a function absorbing shock as well as controlling impacts of foreign risks efficiently over charges of trade regimes that are fixed. Sampling forty-two growing nations, the study assess if the findings of actual GDP, the market equilibrium plus actual ratio of conversion to global produce and actual international rates of premium threats vary through rates of conversion systems. This study indicates some important distinctions in the inconsistency of macroeconomic variables beneath static plus stretchy ratio of exchange systems.

Inflation process will continue as long as the value of request goes beyond the value of bids (Hoffman, 2006). The increase does not affect GDP, but GDP has a significant impact on inflation (Hoffman, 2006).  Average – Average increase in Turkey was 7.37 percent which is integrated into the slight rise (Hoffman, 2006).  Mild inflation will not have a substantial effect on the economy (Hoffman, 2006).  This is simply explained by the Monetarist that shows the quantity theory of money (QTM), which is MV=PY (Hoffman, 2006). This model stipulates that the money distribution would only influence the price level of products and services, where the cash distribution will control the exchange rate, as well as inflation, are created. This reveals that the variances in the money distribution in Turkey market will not influence the production of goods and services, only variables are varying (Hoffman, 2006).

Monetary Growth, Market Liberalization and Market Development within Extended Period

This study of kar, Peker, and Kaplan (2008) shows how various factors affecting financial market development displays a controversy topic in a theoretical point of view in researchers, specifically after the endogenous development model back in the 1980s. The developed model stipulates the benefits of commercial laws with which results in the fluctuating charges of return. It is indicated that individual funds market liberalization plus financial growth might play vital functions in recognition of the financial development of the determinants. This study by Kar et al. (2008) tries to pragmatically approximate the link effect of market capitalism plus monetary growth on financial development during the span 1960-2004. As an alternative to using generic substitutions for the subject, primary modules evaluation is used to improve better directories of market liberalization, economic growth as well as the cooperative impacts. The empirical outcomes achieved concerning Johansen co-integration method indicate market liberalization, monetary growth plus the corporative effects of both influenced to financial development in Turkey during 1963-2005.

Kar et al. (2008) continue to provide evidence that heightened inflation makes the company’s output cost to shoot and decline in manufacturing capacities so that the production of goods and services also decrease. When interest rates shoot high, it affects the investments negatively and vice versa. The reason behind this phenomena is the significant difference between the ratio of investment risk and the interest rate provided. Although, if investments go up, the interest rate goes down (Kar et al., 2008). The amount of investment in a company is the determining factor for a company to produce goods and services. The increase in investment directly affects company produce output that are consequently led by tax revenue also increased. Increased production will only reflect in GDP if only there is a noted economic growth. Therefore, increased production can be considered as an increase in GDP (Kar et al., 2008).

Financial Development Association with Actual Exchange

The study by Rapetti, Scott & Razmi (2012), established a new constructive correlation concerning the actual ratio of exchange (RER) underrating plus financial development. Varying variables in this relationship have been presented, although they all indicate these strategies used have to be robust in growing nations. Rapetti, et al. (2012) broadly evaluated and established proof that the RER-growth association is more predominant in growing nations. The evidence is sensitive towards mechanisms employed to fragment values between already developed and growing nations. Using different grouping mechanism plus experimental techniques to examine the presence of irregularities concerning the organization of nations, the author deduced the impacts of money underrating about development is higher as well as stronger for growing market trends in individual countries.

Turkish Lira will depreciate when compared to other currencies because of higher inflation rate in the economic market (Rapetti, et al., 2012). One major reason that contributes to this is the rise of world oil prices back in 2005, which also led the national fuel to grow slowly affecting the exchange ratio concerning U.S dollar with Turkish Lira became weaker (Rapetti, et al., 2012).  The theory of Purchasing Power Parity (PPP) can as well explain the relationship between exchange rate and inflation variables. Rapetti, et al. (2012) argument shows that the ratio of exchange are in a firm position when a nation relies only upon the ratio of the value of products in a nation.

Rapetti, et al. (2012), concluded that the association concerning RER underrating plus per capita GDP is non-monotonic, as well as highly bounded to unlikely advanced as well as wealthiest nations. This incoherence comprises a mystery that calls for more evaluation.

Interest Rate Effects on Exchange Rates

Sanchez (2008) conducted research to show the relationship between rates of interest and rates of exchange. The study employed a simple theory which integrated the responsibilities of the ratio of conversion pass-through into an internal cost plus differentiates concerning circumstances of expansionary as well as contractionary devaluations. The method outcomes indicate that the relationship concerning the ratio of exchange as well as the ratio of interest, restricted on a hostile danger premium shock, degree of investment are estimated to be heightened to control the contractionary impacts of a devaluation irrespective of whether results are great or creepy. Rates of interest are anticipated to ultimately go up because of the hostile effects on net exports crisis in contractionary devaluation scenarios as well as limited upon situations that require expansionary ones.

Deficit stability of payments is a sign that there has been a flow of money out so that the effect on additional demand for foreign funds in the national economy weakens against foreign currencies (Sanchez, 2008). The depreciation of the Turkish Lira may contribute to the high GDP because of the direct flow of external acquisition in Turkey that continues to go up. Foreign investment is probably going to increase the number of USD invested by United State to Turkey (Sanchez, 2008). The value of investments such as external currencies are converted into domestic money then creates extra merits due to foreign conversion, so that production can continue as well as being advanced so as to increase in GDP

Interest Rates, Saving, Investment and Growth

Warmann and Thirlwall (1994) conducted research that has a correlation with Denizer’s argument concerning financial liberalization and banking efficiency. The study by Warmann and Thirlwall (1994) shows how the theory of financial liberalization affects the economy. They argue that the rising real rates of interest encourage additional saving and acquisition. This hypothesis is evaluated for Mexico during 1960-90, creating a significant difference concerning monetary saving and aggregate saving. Fiscal saving is realized to be associated with actual rates of interest partially over money also flows partially over national investment switch, although overall savings is invariant with relation to actual charges of interest (Warmann and Thirlwall, 1994).

Assets are completely linked towards the distribution of funds that comes from the bank organization, although the net impact on the ratio of increase in investment is undesirable. Additionally, basing McKinnon’s honorable circle model of financial development indicate unfavorable results of the ratio of interest on monetary development. It is verified that several favorable impacts of monetary liberalization, as well as the greater real ratio of interest on financial development, need to come across raising the output of the asset.

A noted increase in economic growth is controlled by higher levels of investment and bigger exports (Warmann & Thirlwall, 1994). The international transactions currency (USD) used during export business activities will lead to elevated number of exchange of foreign money into domestic money. While the value of Turkish Lira steadily depreciates, then the employer will use foreign conversion merit to increase revenues as well as producing more products. As noted from (Warmann & Thirlwall, 1994). That investment can as well have an influence on economic growth. Therefore, in a nutshell, higher exports rate and investments will propel the exchange of foreign money transactions into a national currency. In this case, the owner of foreign money would gain from foreign conversion as a result of depreciating currency of the Turkey economy

Conclusion

First, the relationship between inflation and interest rates to GDP is positive or if the interest rate increases, inflation will show a decline. Second, there is no significant connection concerning the ratio of exchange of the GDP plus the rate of interest on the exchange rates, and lastly, inflation indirectly influences plus a decent intermediary to the link between the interest rates of the GDP. Therefore, this study only uses interest rate, exchange rates, and inflation rates as variables influencing GDP in Turkey. Thus, additional research may add other variables such as non-economic forces or political conditions to affect the GDP stability of Turkey government.

 

References

Abbott, A., & De Vita, G. (2011).  Revisiting the Relationship between Inflation and Growth: A Note on the Role of Exchange Rate Regimes. Economic Issues, 16(1), 37-52.

Acuna-Roa, L. F., & Parra-Polania, J. A. (2016).  Price-Level Targeting versus Inflation Targeting in a New Keynesian Model with Inflation Persistence. Journal of Applied Economics, 19(2), 249-270.

Bayat, T., Senturk, M., & Kayhan, S. (2014).  Exchange Rates and Foreign Exchange Reserves in Turkey:  Nonlinear and Frequency Domain Causality Approach. Theoretical and Applied Economics, 21(11), 27-42.

Bosworth, B. P. (2014). Interest Rates and Economic Growth: Are They Related? 19 pages. (http://crr.bc.edu/wpcontent/uploads/2014/05/wp_2014-8.pdf)

Bouvet, F., & King, S. (2013). Do National Economic Shocks Influence European Central Bank Interest Rate Decisions? The Impact of the Financial and Sovereign Debt Crises. Journal of Common Market Studies, 51(2), 212-231.

Civcir, I. (2004).  The Long-Run Validity of the Monetary Exchange Rate Model for a High Inflation Country and Misalignment: The Case of Turkey.  Emerging Markets Finance and Trade, 40(4), 84-100. Er, P.

Denizer, C. A., Dinc, M., & Tarimcilar, M. (2007). Financial Liberalization and Banking Efficiency: Evidence from Turkey. Journal of Productivity Analysis, 27(3), 177-195. doi:http://dx.doi.org/10.1007/s11123-007-0035-9

Hoffmann, M. (2007). Fixed versus Flexible Exchange Rates: Evidence from Developing Countries. Economica, 74(295), 425-449.

Kar, M., Peker, O., & Kaplan, M. (2008). Trade Liberalization, Financial Development and Economic Growth in the Long Term: The Case of Turkey. South East European Journal of Economics and Business, 3(2), 25-38.

Rapetti, M., Skott, P., & Razmi, A. (2012).  The Real Exchange Rate and Economic Growth:  Are Developing Countries Different? International Review of Applied Economics, 26(6), 735-753.

Sanchez, M. (2008). The Link between Interest Rates and Exchange Rates: Do Contractionary Depreciations Make a Difference? International Economic Journal, 22(1), 43-61.

Warman, F., & Thirlwall, A. P. (1994). Interest Rates, Saving, Investment and Growth in Mexico 1960-90: Tests of the Financial Liberalisation Hypothesis. Journal of Development Studies, 30(3), 629-649.

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