Conflicting Interests and Structural Inflation: Turkey, 1980-1990

Abstract

The paper analyses the structural causes of the recent Turkish inflationary episode. It is argued that monetary policies based on credit tightening alone are not likely to yield the desired target of price stabilisation. Instead, it is hypothesised that the underlying sources of price inflation are affected by income inequality and conflicting claims on national output; and that excessive credit expansion serves mainly to accommodate the inertial inflation thereby originated in the real sector. Given this hypothesis, the paper employs a computable general equilibrium model to investigate four distinct sources of structural inflation for the Turkish economy: (i) the profit/rent inflation based on monopolistic mark-ups over prime costs; (ii) imported inflation due to the import-dependent structure of the domestic industry; (iii) cost-push and demand inflation due to urban wage claims; and (iv) inflation that results from the fiscal pressures of the government's budget deficits. The general equilibrium model is in the Keynesian tradition in determining the production level by aggregate demand constraints. Furthermore, it accommodates oligopolistic mark-up rules and working capital expenses for price determination, and nominal wage fixity to determine the level of employment. The general equilibrium analysis of the macro economy suggests that, over the analysed period, conflicting claims of various social classes on national output and conflicting rates of intersectoral accumulation warranted by competing producer groups have become important sources of disequilibria in the domestic economy; and that the distributional conflict among socio-economic classes had a direct impact on the formation of price movements.