Authoritarianism drives inflation

I was one of the panelists at the conference on inflation dynamics in Turkey organized by Koç University?s Economic Research Forum and the Turkish Industry and Business Association (TÜS?AD) on April 10.

Sumru Altu? from Koç argued that Turkish inflation was high because of structural factors, while Turkey Data Monitor?s Murat Üçer defended a more orthodox line, maintaining that fiscal and monetary policies had not been tight enough. In fact, he argued that Turkey needed a ?Volcker moment,? referring to Fed chairman Paul Volcker, who brought down U.S. inflation in the 1980s; a central banker brave enough would need to drive inflation down once and for all.

I supported both approaches in my remarks. On one hand, I argued the Central Bank had claimed, back in 2010-2011, that the economy was not overheating, while there were red flashes all around. In fact, Mustafa K?l?nç, head of the Bank?s Research and Monetary Policy Department, pointed out after the panel that their evaluations showed they had indeed been mistaken at the time.

Similarly, it is true that both the budget and primary balance, which excludes interest expenditures, improved significantly after 2010, but these measures are related to the strength of the economy. The International Monetary Fund looked at the cyclically-adjusted deficit and found out that fiscal policy was not particularly tight from 2010 to 2012.

However, I also noted that I would not expect inflation to fall to the Central Bank?s 5 percent target even if monetary and fiscal policies were very tight. For one thing, I feel that there are structural factors behind Turkey?s high and volatile food prices, which are still rising despite a deflationary global trend.
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