Fiscal Dominance and Inflation Targeting: Lessons from Turkey

Hasan Ersel · Fatih Özatay

53 citations0/0 files storedEmerging Markets Finance and Trade

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

In the aftermath of the 2000-2001 crisis in Turkey, the banking sector was in turbulence, requiring immediate action. The rescue operation significantly increased the public debt ratio with respect to gross domestic product. At the beginning of 2002, the central bank of Turkey announced that it was going to implement an implicit inflation-targeting regime. The fiscal dominance caused by the high debt ratio severely constrained the conduct of monetary policy. Other obstacles to the conduct of monetary policy included a high level of exchange rate pass-through, inflation inertia, and a weak banking sector. This paper offers an account of the monetary policy experience of Turkey in the postcrisis period and provides lessons for policymakers in other emerging markets.

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References

1984Some Unpleasant Monetarist Arithmetic 2003Towards a New Paradigm in Monetary Economics 2000Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries 2005Inflation Targeting and Debt: Lessons from Brazil 2008Inflation Targeting and Exchange Rate Pass-Through: The Turkish Experience 2004Fiscal Dominance and Inflation Targeting: Lessons from Brazil 2002Banking Sector Fragility and Turkey's 2000-01 Financial Crisis 2007Inflation targeting and exchange rate pass-through

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2015Structural Change and Industrial Policy in Turkey 2011Can inflation targeting regimes be effective in developing countries? The Turkish experience 2012The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey 2015An Empirical Analysis of the Risk-Taking Channel of Monetary Policy in Turkey 2015Price Rigidity in Turkey: Evidence from Micro Data 2012

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