Turkey’s Monetary Policy in the Post-Covid Era

Abstract

Normally, the key to fighting inflation involves tightening monetary policy, such as raising interest rates. Turkey, however, has moved in the opposite direction. In the high inflation environment, the Turkish government implemented interest rate cuts to deal with the inflation problem, which brought a series of special economic effects. This paper mainly focuses on the reasons for Erdogan government’s 2021 Interest Rate Reduction Policy and its positive and negative effects on the economy of Turkey. This paper uses the literature research method to study the above topics. An analysis of the economic consequences of the interest rate policy adopted after the financial crisis in Turkey in 2021 found that although the interest rate reduction policy further worsened inflation, it also promoted the development of the manufacturing industry in the short term, reduced unemployment, and promoted the prosperity of the stock market. These positive results, especially the improvement in employment and the strong performance of the stock market, show persistence over the longer time frame of one year. In the longer term, Turkey faces a brain drain and a widening gap between rich and poor. This unconventional approach in Turkey provides a rare research scenario for studying the economic effects of interest rate adjustments in the context of inflation and contributes a unique case study for other countries in the region.