Hüseyin KAYA

The Relationship Between the Term Structure of Interest Rates and the Macroeconomic Variables: The Case of Turkey

2011

(Supervisor: M. Nedim Süalp)

ABSTRACT

The aim of this research is to investigate the relationship between the term structure of interest rates and the macroeconomic variables in Turkey during the period of January 1993 to January 2009. Since the short term interest rate is at the interconnection of the finance and macro literature and the recent events reveal the close connection between macroeconomic and financial conditions, inspecting this relationship leads to comprehend and model the connection of finance and macroeconomics. In this study, analyzing the corresponding relation we show that movements in the yield curve is mainly driven by the macroeconomic variables in Turkey. We also find that there is a structural break in this relationship which is associated with the change in monetary policy. We document that exchange rate is also an important factor for the yield curve. We also investigate the forecasting performance of different models and find that these models cannot beat the random walk. Additionally, we show that incorporating macroeconomic variables in forecast models, significantly improves the forecasting performance. Moreover, we examine the predictive power of the yield curve on reel economy and find that the slope of the yield curve contain little information about the future growth. In order to asses whether the yield spread predict recession, we firstly determine recessions in monthly base by using BBQ method and find that the slope of the yield curve has ability to predict recessions in Turkey, but the last one.