IB ECONOMICS Real world examples (rwe's)

IB Economics RWE’s: Turkey’s Unorthodox Interest Rate Policy and Hyperinflation

One of the most debated real-world examples (RWE’s) in IB Economics comes from Turkey, where monetary policy took a dramatic turn away from conventional economic thinking. This case is essential for students studying central bank independence, inflation targeting, and macroeconomic instability. Turkey’s unconventional rate cuts in the face of high inflation provide a cautionary tale about the risks of politicising monetary policy.

Turkey: Unconventional Interest Rate Cuts Amid Rising Inflation

Between 2021 and 2023, Turkey’s central bank slashed interest rates despite inflation soaring above 80%. The decision was based on President Recep Tayyip Erdoğan’s personal belief that high interest rates cause inflation—an idea that runs counter to most economic theory. The result: currency collapse, capital flight, and a cost-of-living crisis.

Background Information

Starting in 2021, Turkey’s central bank cut its benchmark interest rate from 19% to 8.5%—at a time when inflation was accelerating rapidly. Instead of tightening policy, the government doubled down on cheap credit to fuel growth and support exports, hoping a weaker lira would boost competitiveness.

Erdoğan dismissed several central bank governors who resisted this policy, eroding the institution’s independence. The policy triggered a collapse in investor confidence, with the Turkish lira losing over 50% of its value in a single year. Inflation surged to a 24-year high of 85.5% by late 2022.

Economic Theory and Policy Objectives

In IB Economics, contractionary monetary policy (raising interest rates) is the standard response to inflation. Higher rates reduce aggregate demand and help anchor inflation expectations. However, Turkey followed an expansionary path, arguing that low rates would reduce production costs and inflation.

This contradicts the Quantity Theory of Money and demand-pull inflation theory, and illustrates what happens when economic policy ignores core macroeconomic principles. The Turkish case also shows the importance of central bank independence—a key institutional factor in ensuring price stability.

Policy Evaluation

In the short run, the policy did stimulate GDP growth and helped Turkish exporters by depreciating the currency. But the long-term consequences were severe:

• Real wages fell

• Inflation spiraled

• Household savings lost value

• Capital controls were introduced

• Foreign investment dried up

The government tried to contain the fallout by introducing FX-protected deposit schemes, but these were costly and unsustainable. The policy disproportionately affected the poor and eroded trust in institutions.

From an IB perspective, Turkey’s approach is ideal for evaluating monetary credibility, inflation expectations, and macroeconomic policy failure. It also supports deeper analysis of how political factors can interfere with optimal policy-making.

Learn with IB Economics RWE’s

Turkey’s unconventional rate cuts give IB Economics students a vivid example of what happens when politics overrides sound economics. It is especially useful for Paper 1 essays on inflation, policy effectiveness, or central banking, and it makes a compelling IA topic.

Real-world examples like this not only strengthen arguments but also show the value of applying economic theory critically. Turkey proves that not all policy responses are grounded in textbook logic—and the consequences can be severe.

IB Economics RWE Scorecard: Turkey’s Unconventional Rate Cuts