Fatih Ozatay

Sustainability of fiscal deficits, monetary policy, and inflation stabilization: The case of Turkey

Abstract There is a widespread consensus among economists that the goal of monetary policy, above all else, should be price stability. This study, by analyzing the Turkish experience in the last 15 years, emphasizes the importance of coordination of fiscal and monetary policies in achieving this aim. It is shown that, despite the rapidly changing financial environment, there are stationary long-run money-income relationships. Moreover, the growth rates of various monetary aggregates have predictive power for future movements in the consumer price index. However, as the Turkish experience made clear, in an economy where there are persistent budget deficits, these properties are not sufficient to conduct a successful monetary policy. The sustainability of fiscal policy is analyzed and rejected. Next, in a medium-term perspective, the levels of sustainable budget deficits compatible with a declining inflation path are calculated by making use of a small macroeconometric model.

A quarterly macroeconometric model for a highly inflationary and indebted country: Turkey

Abstract A quarterly macroeconometric model for Turkey, which is a highly inflationary and indebted country, is developed, estimated and simulated. The model is constructed in the framework of a disequilibrium monetary model. It deals with the credibility issue and currency substitution. By making use of this model, outcomes of various stabilization scenarios are analyzed. It is shown that two similar stabilization policies that only differ in credibility dimension can lead to diverse economic outcomes. It is further demonstrated that, without eliminating macroeconomic imbalances, using exchange rate as an anchor or limiting monetary expansion are fruitless attempts.

Effects of US interest rates and news on the daily interest rates of a highly indebted emerging economy: evidence from Turkey

It has been widely demonstrated that asset prices react sensitively to macroeconomic news releases both in the industrialized countries and emerging markets. However, there are contradicting results on the effects of changes in interest rates of industrialized countries on asset prices of emerging markets. In heavily indebted economies, in addition to these factors, political news and announcements from international institutions that may increase or decrease concerns about debt sustainability can affect asset prices as well. This potential notwithstanding, there has been relatively limited empirical work on the effects of such variables. The objective of this study is to quantify the impact of all of these factors on interest rates of a highly indebted emerging economy. Using daily post-crisis data of the Turkish economy we show that both good and bad political news, International Monetary Fund announcements, and European Union related news significantly affected secondary market government securities yields, whereas volatility of yields was affected mainly by bad news releases. Changes in US Treasury bond rates and ‘appetite’ for risk of foreign investors did not affect government securities yields in the period analysed.

Public sector price controls and electoral cycles

Public enterprise prices are important policy instruments in developing economies. This is why public sector price polices constitute a key element of stabilization programmes implemented in these economies. However, this significance is not specific to stabilization episodes. First, this study questions whether an opportunistic politician can manipulate public prices to win elections. It analyses the impact of such price controls on budget deficits and the repercussions of alternative financing mechanisms of these deficits on the inflation rate and voters’ behaviour. It is shown that electoral inflation cycles are obtained under domestic debt financing, whereas money financing does not permit such a manipulative policy. Second, by focusing on data of the Turkish economy for the 1987(1)–2003(12) period, empirical evidence for such manipulative policies is given.

Turkey's Distressing Dance with Capital Flows

ABSTRACT In the aftermath of the 2001 crisis, Turkey took important steps toward achieving macroeconomic and financial stability. Together with favorable international financial conditions, this helped to achieve a high per capita GDP growth. The high-growth period failed to be sustainable, however. From 2008 to 2013, Turkey had a volatile and low growth. In this article, I aim to analyze the underlying reasons of high volatility of growth and discuss short-term economic policy alternatives to mitigate such undesired fluctuations.

Türkiye’de 2000-2008 döneminde para politikası

Bu makale 2000-2008 doneminde uygulanan para politikasi hakkinda elestirel bir degerlendirme sunmayi amacliyor. 2000 yilinin basinda uygulanmaya baslanan artis hizi sabit kur rejimi ve parasal hedefleme 2000 Kasim – 2001 Şubat krizleri ile sona erdi. Krizin temelinde bankacilik sektorunun kirilganligi vardi. Krizden sonra bankacilik sektorunu kurtarma operasyonu kamu borcunun milli gelire oraninda cok buyuk bir sicramaya yol acti. Dolayisiyla, kriz sonrasinda para politikasi uygulamasi mali baskinlik ve zayif bankacilik sektoru nedeniyle onemli olcude kisitlandi. 2001 yilinin sonunda, Merkez Bankasi, krizden hemen sonra gonulsuzce uyguladigi parasal hedefleme rejimine son verdi. 2002-2005 doneminde ortuk enflasyon hedeflemesi uygulandi ve donemin sonunda acik enflasyon hedeflemesine gecildi. Her iki donemin kur rejimi dalgali kur rejimiydi. Makalede, krize giden surecte para politikasinin rolunu tartisiyor, ortuk enflasyon hedeflemesinin tercih edilmesinin ve acik bicimde enflasyon hedeflemesi uygulamasina gecilmesinin 2006’nin basina ertelenmesinin arkasindaki nedenleri inceliyor ve bazi iktisat politikasi cikarsamalari yapiyoruz.