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Debt, Deficits and Inflation on the Road to the EU: the case of Turkey


  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

  • Günes Kamber

    (Reserve Bank of New Zealand)


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

Suggested Citation

  • Jérôme Creel & Günes Kamber, 2004. "Debt, Deficits and Inflation on the Road to the EU: the case of Turkey," Sciences Po publications info:hdl:2441/3003, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/3003

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    References listed on IDEAS

    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. 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.
    3. Ayca Tekin-Koru & Erdal Ozmen, 2003. "Budget deficits, money growth and inflation: the Turkish evidence," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 591-596.
    4. Oya Celasun & R. Gaston Gelos & Alessandro Prati, 2004. "Would "Cold Turkey" Work in Turkey?," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 493-509, November.
    5. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    6. 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.
    7. Laura Papi & G. C. Lim, 1997. "An Econometric Analysis of the Determinants of Inflation in Turkey," IMF Working Papers 97/170, International Monetary Fund.
    8. Metin, Kivilcim, 1998. "The Relationship between Inflation and the Budget Deficit in Turkey," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 412-422, October.
    9. 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.
    10. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
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    12. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December.
    13. Burnside, Craig, 2004. "Currency crises and contingent liabilities," Journal of International Economics, Elsevier, vol. 62(1), pages 25-52, January.
    14. Metin, Kivilcim, 1995. "An Integrated Analysis of Turkish Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 513-531, November.
    15. Esfahani, Hadi Salehi, 2003. "Fatal attraction: Turkey's troubled relationship with the European Union," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(5), pages 807-826.
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    Cited by:

    1. Djelassi, Mouldi & Essid, Lobna, 2012. "Le niveau des prix en Tunisie est-il déterminé par la politique budgétaire?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(2), pages 231-256, Juin.
    2. Hassan Ayoub & Jérôme Creel & Étienne Farvaque, 2008. "Détermination du niveau des prix et finances publiques : le cas du Liban, 1965 – 2005," Revue d’économie du développement, De Boeck Université, vol. 16(3), pages 115-141.
    3. Ebru Voyvoda & Erinc Yeldan, 2015. "Aspects of Fiscal Policy in Turkey," Working papers wpaper109, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    4. Waszkiewicz Grzegorz, 2016. "Drivers of Greek and Turkish Defense Spending," International Journal of Management and Economics, De Gruyter Open, vol. 51(1), pages 33-46, September.

    More about this item

    JEL classification:

    • 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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