External Factors on Turkish Short-Term Interest Rates and Daily Exchange Rates: Tranquil Periods versus Politically Stressed Times

This chapter studies the impacts of short-term interest rates of United States and emerging markets risk premia as external factors on Turkish short-term interest rates and daily exchange rates during the period of January 2011–December 2018. Following Edwards and Borensztein et al., we construct a vector autoregressive (VAR) model with the domestic short-term interest rates, exchange rate against the US Dollar, the US interest rates and iShares MSCI emerging markets ETF. Hereby, we intend to shed some light on the reaction of Turkish interest rates and exchange rates to the short-term US interest rates and emerging markets instability. As other emerging countries, Turkey is rather economically and politically unstable country. Even a little political development may cause a serious volatility in the market. For that reason, in this study we specifically examine the periods that are known as politically stressed times and tranquil periods separately to see how external factors’ behaviors change during shock periods.