Investment spending and interest rate policy: The case of financial liberalisation in Turkey

Abstract

The purpose of the present study is to analyse the impact of interest rate policy on investment spending in Turkey over a period which covers years of both financial repression and financial liberalisation. The model presented suggests that investment will be positively correlated with below‐equilibrium interest rates and negatively correlated with above‐equilibrium rates. The model is tested using a switching regime model with an unknown equilibrium rate of interest. The results suggest that setting interest rates too high may be as detrimental to economic health as setting them too low. Moreover there is evidence of an autonomous downward shift in the investment function during the liberalisation period which may have resulted from heightened uncertainty during the period.