Macroeconomics of twin-targeting in Turkey: analytics of a financial computable general equilibrium model

Cagatay Telli, Ebru Voyvoda and Erinc Yeldan

International Review of Applied Economics, 2008, vol. 22, issue 2, 227-242

Abstract: The paper provides an overview of the post-1998 Turkish economy and constructs a macroeconomic computable general equilibrium (CGE) model to illustrate the real and financial sectoral adjustments of the Turkish economy under the conditionalities of the 'twin targets': on primary surplus to gross national product (GNP) ratio and on the inflation rate. We further utilize the model to study three sets of issues: (i) the critical role of the expanded foreign capital inflows in resolving the macroeconomic impasse between the disinflation motives of the central bank and imperatives of debt sustainability and fiscal credibility of the ministry of finance; (ii) reduction of the central bank's interest rates, and (iii) a labor market reform of reducing payroll taxes. Our simulation results suggest that the current monetary strategy, which involves a heavy reliance on foreign capital inflows along with a relatively high real rate of interest, is effective in bringing inflation down; yet it suffers from increased cost of interest burden to the public sector, and strains fiscal credibility. In contrast, given the ex ante constraints of the domestic economy in the short run, an alternative heterodox policy of reduction of the central bank interest rate and lowering of the payroll tax burden in labor markets indicate strong employment and growth effects along with strengthened fiscal credibility.

Keywords: twin-targeting; CGE; inflation; central banks (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/02692170701880767

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