Macroeconomics of twin-targeting in Turkey: analytics of a financial computable general equilibrium model
Date
2008Source Title
International Review of Applied Economics
Print ISSN
0269-2171
Electronic ISSN
1465-3486
Publisher
Routledge
Volume
22
Issue
2
Pages
227 - 242
Language
English
Type
ArticleItem Usage Stats
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Abstract
The paper provides an overview of the post-1998 Turkish economy and constructs a macroeconomic computable general equilibrium (CGE) model to illustrate the real and financial sectoral adjustments of the Turkish economy under the conditionalities of the 'twin targets': on primary surplus to gross national product (GNP) ratio and on the inflation rate. We further utilize the model to study three sets of issues: (i) the critical role of the expanded foreign capital inflows in resolving the macroeconomic impasse between the disinflation motives of the central bank and imperatives of debt sustainability and fiscal credibility of the ministry of finance; (ii) reduction of the central bank's interest rates, and (iii) a labor market reform of reducing payroll taxes. Our simulation results suggest that the current monetary strategy, which involves a heavy reliance on foreign capital inflows along with a relatively high real rate of interest, is effective in bringing inflation down; yet it suffers from increased cost of interest burden to the public sector, and strains fiscal credibility. In contrast, given the ex ante constraints of the domestic economy in the short run, an alternative heterodox policy of reduction of the central bank interest rate and lowering of the payroll tax burden in labor markets indicate strong employment and growth effects along with strengthened fiscal credibility.
Keywords
Central banksCGE
Inflation
Twin-targeting
Capital flow
Computable general equilibrium analysis
Inflation
Interest rate
Macroeconomics
Eurasia
Turkey