The efficiency of primary sovereign bond markets in Turkey: The so-called Fisher puzzle reconsidered

Abstract

Many prior studies have tested the validity of the Fisher effect, with results proving controversial, regardless of the econometric models, country groups, or time spans chosen. Therefore, to solve the so-called Fisher puzzle, this study aims to reveal whether current interest rates, which are set in the primary bond markets, carry information about actual inflation rates when the conventional direction of causation is reversed, using monthly Turkish data from the 2010-2018 period. In line with our expectations, we found a significant long-run coefficient (0.92), which indicates that changes in interest rates are rational expectations of changes in current inflation rates, though a full Fisher effect was not observed. Moreover, the short-run coefficients were also significant, which highlights the fact that the unanticipated movements in these variables act as early signals of persistent future price-level changes. Therefore, monetary authorities should respond rapidly in the short run using rules-based proactive policies to curb long-run volatilities, which also restrict the power of estimations, as market participants tend to assign higher risk premiums to bond yields when prices are expected to surge. (C) 2021 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.