Debt, Deficits and Inflation on the Road to the EU: the case of Turkey
AbstractTurkey 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 InfoPaper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/3003.
Date of creation: Apr 2004
Date of revision:
Publication status: Published in Revue de l'OFCE, 2004, pp.157-174
Other versions of this item:
- Jérôme Creel & Günes Kamber, 2004. "Debt, deficits and inflation on the road to the EU: the case of Turkey," Revue de l'OFCE, Presses de Sciences-Po, vol. 91(5), pages 157-174.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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