What Happened
Turkish President Erdogan held the unorthodox view that high interest rates cause inflation — the opposite of conventional economics. When Turkey faced currency pressure in 2018, Erdogan dismissed the central bank governor who raised rates. He repeated this with four consecutive governors who dared to tighten policy.
The results were predictable: the lira fell from 4 to the dollar in 2018 to 27 by 2022. Inflation hit 85% in October 2022. The central bank was cutting rates while inflation was rising, following Erdogan’s theory that low rates cure inflation. The lira collapsed further with each cut.
After winning re-election in May 2023, Erdogan appointed Hafize Erkan as central bank governor and Mehmet Simsek as finance minister — orthodox economists. The central bank raised rates from 8.5% to 40% over 12 months. Inflation began to decline. Partial credibility was restored. The cost: millions of Turks saw their savings destroyed.
The Mechanism
The cost of destroying central bank credibilityMonetary credibility is built slowly and destroyed quickly. When a central bank loses its independence, bond and currency markets immediately price the risk of future inflation. Currency weakness feeds directly into import prices, creating the inflation the unorthodox policy was supposed to prevent. The self-fulfilling dynamic makes recovery extremely costly — the central bank must raise rates far above what would have been needed with intact credibility.
What the Consensus Believed
The prevailing view before the reckoning
Erdogan’s "Turkish economic model" was an unorthodox experiment. Perhaps unconventional monetary policy would work in an unconventional economy. The political system could manage the currency pressure. The West was wrong about interest rates.
What the Record Shows
Central bank independence is not optional
Every country that has tried to override orthodox monetary policy has ended in currency and inflation crisis. Turkey, Venezuela, Zimbabwe, Argentina. The record is perfect.
The Arthur Burns parallel
Burns accommodated Nixon. Inflation hit 14.8%. Volcker needed 20% rates to fix it. Turkey needed 40% rates to fix Erdogan's 3% rates. Political interference always raises the ultimate cost.
Credibility restoration is slow and expensive
Turkey had to raise rates to 40% — five times higher than orthodox policy would have required — to regain any credibility. The interest rate cost of losing credibility dwarfs the political benefit of low rates.
EM populations pay the price
The 85% inflation hit ordinary Turks hardest. Savings wiped out, wages falling in real terms. Erdogan’s experiment was paid for by Turkish citizens, not by Erdogan.
↑ Cognitive pattern: Authority Bias — Presidential economic theory overriding institutional expertise
Key Voices
Called It Right
Orthodox economists
IMF / academic consensus
“Erdogan firing central bank governors who raise rates is banana republic economics. This ends very badly.”
July 2019 Right — 85% inflation
EM analysts
Multiple funds
“Every central bank governor Erdogan fires confirms the lira will weaken further. This is not stopping.”
2021 Right
Wrong
Erdogan
Turkish government
“Interest rates are the mother of all evil. High rates cause inflation. Low rates will stabilize the lira.”
September 2021 Wrong — inflation hit 85%
Turkish officials
Various
“The Turkish economic model is working. Our unconventional approach will be vindicated.”
2021 Abandoned after election 2023