IMF Programmes, Fiscal Policy and Growth: Investigation of Macroeconomic Alternatives in an OLG Model of Growth for Turkey1

Ebru Voyvoda and Erinc Yeldan

Comparative Economic Studies, 2005, vol. 47, issue 1, 79 pages

Abstract: In this paper, we investigate the fiscal policy alternatives on domestic debt management and public expenditures on education, cohort welfare, and growth for the Turkish economy. We utilise a growth model in the overlapping generations (OLG) tradition with intertemporally optimising agents and open capital markets, calibrated to the Turkish economy in 1990s. We examine the macroeconomic effects of the current IMF-led austerity programme driven by the objective of attaining primary fiscal surpluses and illustrate the ruinous effects of constrained human capital investments due to insufficient funds to public education, and constrained real production activities due to the current mode of financing of domestic debt. We then examine various taxation alternatives to mitigate the reductions in the availability of public funds to reproducible factors of production. Our results suggest that the current fiscal programme based on the primary surplus objective suffers from serious trade-offs on growth and fiscal targets, and that an alternative public expenditures programme with the objective of reviving public funds for education and for social infrastructure is likely to produce superior economic performance. Comparative Economic Studies (2005) 47, 41–79. doi:10.1057/palgrave.ces.8100065

Date: 2005
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