Assessing the Impacts and Policy Alternatives
Edited by Gerald A. Epstein and A. Erinc Yeldan
Chapter 10: A General Equilibrium Assessment of Twin-Targeting in Turkey
Cagatay Telli, Ebru Voyvoda and A. Erinç Yeldan1 10.1 INTRODUCTION: MACROECONOMICS OF TWIN-TARGETING IN TURKEY After a decade of failed reforms and deteriorated macroeconomic performance, Turkey entered the millennium under a Staff Monitoring Program signed with the International Monetary Fund (IMF) in 1998, and put into effect in December 1999. The program currently sets the macroeconomic policy agenda in Turkey and relies mainly on two pillars: (1) fiscal austerity that targets a 6.5 percent surplus for the public sector in its primary budget2 as a ratio to the gross domestic product (GDP); and (2) a contractionary monetary policy (through an independent central bank) that exclusively aims at price stability (via inflation targeting). Thus, in a nutshell the Turkish government is charged to maintain dual targets: a primary surplus target in fiscal balances (at 6.5 percent to the GDP); and an inflation targeting central bank whose sole mandate is to maintain price stability and is divorced from all other concerns of macroeconomic aggregates – hence the terms in the title: macroeconomics under twintargeting. According to the logic of the program, successful achievement of the fiscal and monetary targets would enhance ‘credibility’ of the Turkish government ensuring reduction in the country risk perception. This would enable reductions in the rate of interest that would then stimulate private consumption and fixed investments, paving the way to sustained growth. Thus, it is alleged that what is being implemented is actually an expansionary program of fiscal contraction. On the monetary policy front, the Central Bank of...