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Debt, deficits and inflation on the road to the EU: the case of Turkey

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  • Jérôme Creel
  • Günes Kamber

Abstract

Turkey experienced a severe banking crisis in 2001 that resulted in huge social and fiscal costs since most defaulting banks had already been compulsorily transferred to a publicly-held fund (the deposit insurance fund). Basing ourselves on estimations by Burnside et al. [2003, NBER Working Paper], we further investigate the links between these fiscal costs and the subsequent debt deflation that occurred in Turkey after the crisis. Our analysis also draws extensively on the Fiscal Theory of the Price Level (FTPL) and on the empirical methodology originally proposed by Canzoneri et al. [2001, American Economic Review]. Our main results are twofold. First, the fiscal costs attributable to the banking crisis can be given a FTPL interpretation and debt deflation appears as a deliberate policy. Second, the FTPL interpretation is not reliable over a time span excluding the most recent years, and the public management of the banking crisis can be considered as an "exceptional circumstance". The policy implications are then that without a substantial improvement in the management of banks, a dramatic economic episode like the 2001 crisis could again occur and the Turkish disinflation efforts could be wasted and lost for a long period. Hence, converging towards the EU standards in terms of deregulation seems a reasonable condition for avoiding long years of high deficits and inflation. JEL classifications: F31, E62, E63

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Bibliographic Info

Article provided by Presses de Sciences-Po in its journal Revue de l'OFCE.

Volume (Year): 91 bis (2004)
Issue (Month): 5 ()
Pages: 157-174

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Handle: RePEc:cai:reofsp:reof_075_0157

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  1. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  2. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  3. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2006. "Government finance in the wake of currency crises," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 401-440, April.
  4. Isik, Ihsan & Hassan, M. Kabir, 2003. "Financial disruption and bank productivity: The 1994 experience of Turkish banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 291-320.
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  12. Creel, Jerome & Bihan, Herve Le, 2006. "Using structural balance data to test the fiscal theory of the price level: Some international evidence," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 338-360, June.
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Cited by:
  1. Etienne Farvaque & Hassan Ayoub & Jérôme Creel, 2008. "Détermination du niveau des prix et finances publiques : le cas du Liban, 1965-2005," Sciences Po publications 2008-14, Sciences Po.

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