A Causality Test on the Gibson Paradox in Turkey

Abstract

In general, it is believed that interest rate is an important instrument for central banks while struggling with inflation. However, Gibson Paradox tells the story in a different way. So how does it work in reality? This study examines the validity of Gibson Paradox in Turkey empirically by using monthly data belonging 01:2003 - 05:2015 period. According to analysis results, there is an interaction between floating exchange rate and inflation targeting and also between monetary policy base interest rate (base rate) and consumer price index (CPI). On the account of these results we reach the conclusion that Gibson paradox is valid for Turkey.