Over the past two decades Turkey has has been plagued by high inflation and persistent fiscal imbalances that have prevented the economy from reaching its potential growth levels. Facing a large fiscal deficit Turkish government has relied on a mix of borrowing and money creation, rather than making structural economic changes. The aim of this paper is twofold: first, we analyse the factors that led the Turkish economy to its currency crises in 1994 and 2001. Second, we test if the financial mechanism is such that the deficit has not entailed ever-increasing shares of debt and money to income, that is if public position is sustainable or not. To analyze sustainability of fiscal policy, we test the precence of a cointegration relationship between primary surplus and debt or alternatively between public revenues (including seigniorage) and expenditures.
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