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International Journal of Social Sciences

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Central banks play an important role in the direction of capital flows through the interest rate channel. Capital flows also impact the exchange rate, which are important goals of monetary policy. Due to the prominence of the U.S. Dollar in international trade, decisions made by the Federal Reserve Bank (FED) also affect the decisions of Central Banks of other countries. During the 2008 financial crisis the FED reached the zero-bound of its policy rate (the federal funds rate) and engaged in quantitative easing. This lead to capital outflows from developing countries, who then raised interest rates defensively to protect their economies from adverse effects in their terms of trade.

This study examines the relationship between interest rates, effective exchange rates and growth by means of Granger Causality test, as a result of interest rates determined by FED in post-2003 period, in the direction of interest rate Central Bank of the Republic of Turkey (CBRT/TCMB) applies to Dollar deposits. Turkey is a country that floats its exchange rate but protects against large movements. According to analysis results, the decisions made by CBRT are affected by FED interest rate changes. On the other hand, it was concluded that there was not any effect of CBRT interest rates on the exchange rate, consistent with its floating regime.

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