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Perspectives on High Real Interest Rates in Turkey

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Author Info
Prakash Kannan

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Abstract

The Turkish economy is typically characterized as having particularly high real interest rates. Fundamental considerations, such as high growth rates or high returns to capital, do not provide a satisfactory resolution of this puzzle. Instead, we find that two other factors- doubts about the sustainability of disinflation and the existence of a risk premium-have a significant impact on the level of real interest rates in Turkey. Importantly, fiscal policy variables are shown to affect both these factors, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/251.

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Length: 31 pages
Date of creation: 28 Oct 2008
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Handle: RePEc:imf:imfwpa:08/251

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Keywords: Interest rates ; Turkey ; Risk premium ; Disinflation ; Fiscal policy ; Foreign exchange ; Capital ; Economic models ;

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