A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Kibritçioğlu, Aykut et al. Book — Published Version Inflation and Disinflation in Turkey Suggested Citation: Kibritçioğlu, Aykut et al. (2002) : Inflation and Disinflation in Turkey, ISBN 0-7546-3065-X, Ashgate, Aldershot, http://acikarsiv.ankara.edu.tr/browse/4660/5176.pdf This Version is available at: http://hdl.handle.net/10419/110203 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Contents List of Contributors vi PART I. INTRODUCTION 1 Introduction: Turkey’s Disinflation Struggle Aykut Kibritçioğlu, Libby Rittenberg and Faruk Selçuk 3 2 Turkish Economy: 1980–2001 Ahmet Ertuğrul and Faruk Selçuk 13 PART II. SOURCES OF INFLATION IN TURKEY 3 Causes of Inflation in Turkey: A Literature Survey with Special Reference to Theories of Inflation Aykut Kibritçioğlu 43 4 Budget Deficit, Inflation, and Debt Sustainability: Evidence from Turkey, 1970–2000 O. Cevdet Akçay, C. Emre Alper and Süleyman Özmucur 77 5 Long Memory in Turkish Inflation Rates Haluk Erlat 97 PART III. PERSPECTIVES ON DISINFLATION IN TURKEY 6 Inflationary Expectations and the Costs of Disinflation: A Case for Costless Disinflation in Turkey? Selahattin Dibooğlu 125 7 Turkish Inflation and Real Output Growth: 1963–2000 Tevfik F. Nas and Mark J. Perry 139 8 Seigniorage, Currency Substitution and Inflation in Turkey Faruk Selçuk 155 9 The Impact of a Disinflation Program on the Structure of the Turkish Banking Sector: Evidence from 1988–99 C. Emre Alper, M. Hakan Berument and N. Kamuran Malatyalı 167 Index 183 v List of Contributors O. Cevdet Akçay, Department of Economics, Koç University, Rumeli Feneri Yolu, 80910 Sarıyer, Istanbul, Turkey, e-mail: [email protected] C. Emre Alper, Department of Economics, Boğaziçi University, 80815 Bebek, Istanbul, Turkey, e-mail: [email protected] M. Hakan Berument, Department of Economics, Bilkent University, 06533 Bilkent, Ankara, Turkey, e-mail: [email protected] Selahattin Dibooğlu, Department of Economics, MC 4515, Southern Illinois University at Carbondale, Carbondale, IL 62901, USA, e-mail: [email protected] Haluk Erlat, Department of Economics, Middle East Technical University, 06531 Ankara, Turkey, e-mail: [email protected] Ahmet Ertuğrul, Department of Economics, Bilkent University, 06533 Bilkent, Ankara, Turkey, email: [email protected] Aykut Kibritçioğlu, Department of Economics, Ankara University, 06590 Cebeci, Ankara, Turkey, e-mail: [email protected] N. Kamuran Malatyalı, Financial Markets Department, State Planning Organization, Necatibey Cad. 108, 06100 Yücetepe, Ankara, Turkey, e-mail: [email protected] Tevfik F. Nas, Department of Economics, University of Michigan-Flint, Flint, MI 48502, USA, e-mail: [email protected] Süleyman Özmucur, Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104, USA, e-mail: [email protected] Mark J. Perry, Department of Economics, University of Michigan-Flint, Flint, MI 48502, USA, e-mail: [email protected] Libby Rittenberg, Department of Economics & Business, The Colorado College, 14 E. Cache La Poudre, Colorado Springs, CO 80903, USA, e-mail: [email protected] Faruk Selçuk, Department of Economics, Bilkent University, 06533 Bilkent, Ankara, Turkey, e-mail: [email protected] vi PART I INTRODUCTION Chapter 1 Introduction: Turkey’s Disinflation Struggle Aykut Kibritçioğlu, Libby Rittenberg and Faruk Selçuk 1. Macroeconomic Background In 1980 Turkey embarked on an extensive program of economic stabilization and liberalization. Over the ensuing 20-year period, the Turkish economy moved from being inward-oriented and fairly isolated to being export-oriented and well integrated into world trade and financial markets. Overall, Turkey’s economic performance, summarized by an average annual rate of growth of real GDP of about 4.5% from 1980 to 2000, can be characterized as adequate but not outstanding. As discussed in greater depth in Chapter 2, which details the behavior of the Turkish economy in the past two decades, more troubling is the fact that the economic dynamism unleashed by the initial reforms in the 1980s gave way in the 1990s to lower growth on average and an economy characterized by cycles of boom and bust. Rather than reducing the already high inflation of the second half of the 1980s, which averaged around 60%, inflation in the 1990s averaged around 80%. The result is that the gap between Turkey and the poorest economies of the European Union, such as Greece and Portugal, increased. Per capita income was $2412 in Portugal and $1289 in Turkey in 1982 (based on nominal GDP at current prices). The poorest economy of the European Union (Portugal) increased its per capita income five fold to $12,000 in 20 years while the figure on the Turkish economy stalled between $2000– $3000 during the same period. The contrast in economic performance with many Asian countries, whose growth in the 1990s averaged in the 5% to 7% range, is also striking. While the 1990–91 Persian Gulf crisis, the 1998 Russian financial crisis, and two major earthquakes in 1999 must share some of the responsibility for rising output volatility and overall poorer economic performance, internal policy decisions also played a major role. In 3 4 Inflation and Disinflation in Turkey particular, the internal reason for this less than satisfactory economic performance rests on the inability to put in place and sustain a series of policies that would bring the initial reforms to maturity. The enduring symbol of the incompleteness of the structural reform process is the persistent and high inflation. While the high double-digit inflation did not turn into hyperinflation, as is so often the case, it is clear that its persistence has, among other things, wreaked havoc on government finances and borrowing, stymied investment, and created another obstacle in Turkey’s path toward joining the European Union. 2. Disinflation Programs Hence, in the latter half of the 1990s, Turkey undertook a series of disinflation programs. Following the financial crisis in 1994, Turkey entered into a stand-by arrangement with the IMF but it was quickly abandoned, as the governments of that period chose to follow relatively expansionary policies. In 1998, the government again began talks with the IMF, but this program gave way to pressures emanating from the Russian financial crisis in the summer of 1998, the April 1999 general elections, and the devastating earthquakes in August and October of 1999. Somewhat paradoxically, these same shocks may have also contributed to a broader consensus in the society on the importance of completing the reform process. A more far-reaching restructuring and reform program, conceived of in the summer and fall of 1999, had the specific target of reducing inflation to single digits by the end of the year 2002. The program gained further momentum after the country signed a stand-by agreement with the IMF in December 1999. A main tool of the disinflation program, designed to decrease imported inflation and inflationary expectations, was the adoption of a crawling peg regime; i.e., the percent change in the Turkish lira value of a basket of foreign exchanges was fixed for a period of a year and a half. To support the disinflation goal, the program also called for: stringent fiscal policy, obtained through tax increases and changes in public sector wages and agricultural price supports in line with the inflation targets; structural reforms in the areas of banking, social security, agriculture, and energy; and a renewed privatization drive. It was hoped that these moves would not only bring down inflation, but do so in an environment that would encourage foreign direct investment, improve productivity, and hence have minimal negative effects on economic growth. Introduction: Turkey’s Disinflation Struggle 5 The program was “pre-loaded” in the sense that several measures towards restructuring the economy took place before the program commenced. This conditionality increased the probability of success of the program. However, success of the pre-announced crawling peg rested on progress on the other aspects of the program so as to avoid substantial appreciation of the Turkish lira and to generate enough capital inflows, especially in the form of foreign direct investment, to finance the current account deficit. During the first half of the year 2000, the economy enjoyed a