Disinflation, fiscal sustainability, and labor market adjustment in Turkey

This paper analyzes the effects of monetary policy and fiscal adjustment on output and unemployment in Turkey. The model on which the analysis is based accounts for rural-urban migration, a large urban informal sector, flexible exchange rates, a dollarized banking system, and interactions between default risk on government liabilities, credibility, and inflation expectations. The short- and long-run effects of a rise in official interest rates and tax increases are analyzed. The results highlight the importance of accounting for the link between default risk and credibility in understanding the real and financial effects of macroeconomic adjustment.Labor Markets,Economic Theory&Research,Banks&Banking Reform,Public Sector Economics&Finance,Economic Stabilization

Turkey at the Crossroads

The key policy challenge for Turkey in the years ahead will be to enhance and consolidate the advances made since the nation’s 2000-01 economic crisis. Higher growth could reduce unemployment and raise living standards toward European Union levels. This paper reviews Turkey’s policy performance in terms of growth, inflation, debt, fiscal and financial sector reform, and labor markets. The analysis assesses the effectiveness of macroeconomic stabilization and structural reforms since the crisis and provides guideposts for future policy.Economic growth;Labor markets;Financial sector;foreign currency, inflation, banking, public debt, external debt, employment, debt sustainability, central bank, expenditures, banking system, debt ratio, fiscal adjustment, labor force, government debt, foreign currency debt, currency debt, debt management, expenditure, debt service, private banks, capital adequacy, domestic debt, real interest rates, trade openness, monetary policy, currency mismatch, debt stock, unemployment, jobs, government securities, per capita income, labor force participation, high inflation, recapitalization, sovereign debt, labor market, gnp, foreign assets, government revenue, inflationary expectations, growth accounting, investors, fiscal policy, unemployment insurance, primary expenditure, expenditure cuts, debt threshold, fiscal consolidation, debt reduction, external shocks, fiscal reforms, debt thresholds, real wages, deposit insurance, trade flows, growth rates, bank restructuring, gdp growth, terms of trade, total factor productivity, fiscal effort, debt servicing, expenditure reduction, equation, fiscal impulse, fiscal adjustments, debt burden, inflation targeting, current account, external volatility, foreign exchange, employment growth, labor force survey, labor productivity, tax revenue, employment rate, public finances, international capital markets, external trade, trade liberalization, capital markets, banking regulation, banking services, money market, capital adequacy ratios, government bonds, capital adequacy ratio, inflation process, debt structure, empirical model, fiscal behavior, real interest rate, trade growth, per capita gnp, nontariff barriers, tax rates, job security, employment generation, fiscal operations, fiscal targets, international investment, unemployed, actual debt, debt ratios, inflation rate, current account deficit, capital account liberalization, low inflation, currency risk, debt crisis, high interest rates, currency mismatches, inflation rates, private investors, primary surplus ratio, employment rates, agricultural employment, external debt service, labor cost, capital position, labor demand, foreign banks, debt management committee, tier 2 capital, bank owners, banking license, bank assets, capital base, bank lending, fiscal efforts, probability distribution, tax increases, fiscal adjustment efforts, capital expenditure, adjustment path, fiscal strategy, tax policy, probability, statistics, domestic currency, foreign debt, domestic debt stock, sovereign debt crisis, inflation dynamics, foreign investors, aggregate employment, skilled labor, labor costs, world growth, economic liberalization, debt intolerance, output growth, expanded trade, open trade, liquid foreign currency, inflation data, employment protection, external borrowing, trade share, debt dynamics, public debt management, banking sector, capital outflow, private banking, return on equity, international capital, external financing, direct investment, foreign direct investment, low labor force participation, debt management strategy, repayments, capital needs, tier 1 capital, labor market policies, bank recapitalization, bank liquidity, reserve accumulation, unemployment rate, bankers, high unemployment, debt maturities, return on assets, collective dismissals, labor force growth, expenditure adjustment, unemployed workers, labor supply, tax system, fiscal primary deficit, fiscal control, primary deficit, labor market regulation, high unemployment rate, high unemployment rates, employment protection legislation, agricultural jobs, forms of employment, employment in agriculture, job security provisions, labor force participation rate, unemployment insurance fund, service employment, job security regulations, productive employment, collective bargaining, total employment, labor productivity growth, labor compensation, share of employment, bank creditors, debt restructuring, investor confidence, credit expansion, unemployment insurance systems, subsidiaries, banking practices, loan concentration, banking supervision, employment in industry, banking activities, banking insurance, banking law, regular employment, capital assistance, subordinated debt, bank reform, banking assets, bank failure, internal control, labor value, labor legislation, banking reform, banking system assets, bank supervisor, bank rehabilitation, stabilization policies, long-term unemployment, unemployment rates, bank profitability, bank losses, connected lending, loan classification, deposit insurance scheme, short-term funds, central government budget, low employment, labor force participation rates, increase in interest rates, private debt, debt data, dollar value, reserve assets, constant local currency, lower inflationary expectations, external debt data, import substitution, economic cooperation, trade reforms, real gnp, domestic investment, preferential agreements, per capita incomes, changes in trade, liberalization of trade, import barriers, growth rate, real gdp, competition policy, export subsidies, increased openness, external tariff, antidumping legislation, external liabilities, price stability, limited equity, sovereign defaults, reserve bank, net debt, debt management operations, highly indebted countries, rise in inflation, short-term debt, debt defaults, repayment capacity, reserve holdings, real value, nominal interest rates, lower?inflation, external debt stock, macroeconomic stability, monetary economics, rising inflation, inflationary pressure, market debt, annual inflation, moderate inflation, domestic borrowing, external debt position, maturity structure of debt, debt statistics, indebted countries, debt service obligations, external indebtedness, liquidity injections, currency risks, rate of inflation, financial stability, export growth, medium-term fiscal strategy, fiscal authorities, descriptive statistics, fiscal data, fiscal institutions, tax policy reform, interest income, coupon bonds, mutual funds, commercial banks, standard errors, fiscal consolidation effort, goodness of fit, government budget, fiscal adjustment episodes, fiscal sustainability, fiscal improvements, fiscal balance, tax administration, fiscal reform, fiscal regime, fiscal policies, dummy variable, fiscal performance, equations, investor relations, foreign asset holdings, foreign asset, risk exposure, monetary fund, investment banks, foreign exchange intervention, foreign liabilities, crisis affected, onlending, low debt, institutional framework, risk premium