Politics or Bureaucracy? Which matters most for determining Real Interest Rates in Türkiye?

OpenAlex İngilizce

This paper analyses whether political and/or bureaucratic regime changes cause significant shifts in the mean of Türkiye’s short-term real interest rate for the period between 1985:6 and 2023:12. In the sample period Türkiye has witnessed the rule of 23 governments with 11 different prime ministers, 5 different political parties, and 16 Central Bank of the Republic of Türkiye (CBRT) governors, along with a critical political system change. When the same period was tested for purely statistical structural breaks using the Bai and Perron (1998) method 6 distinct break points were identified. Even after controlling for these structural breaks, we find that dummy variables corresponding to party switch in the Prime Ministry (or Presidency after 2018) are still strongly significant for explaining real interest rate fluctuations. However, the change in CBRT governorship seems to have a comparatively weak effect on Türkiye’s real interest rate. Hence, for Türkiye politics indeed matters and the real interest rate is not policy invariant.