Disinflation, Fiscal Sustainability, and Labor Market Adjustment in Turkey
World Bank, Europe and Central Asia Region, Poverty Reduction and Economic Management Sector Unit, 2006 - Inflation (Finance) - 103 pages
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.
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Agenor allocated assets assumed baserun bond rate central bank commercial banks composite input consumption credibility December 2005 December decline deposit rate disinflation disposable income DLFp domestic banks economy EDEPR effect elasticity employment equation equilibrium exogenous expected inflation exports fiscal adjustment foreign borrowing foreign-currency deposits held formal sector households government bonds household h income of profit increase informal sector infrastructure capital intermediate consumption labor market lending rate loans long run MacroSAM medium run migration Monetary nominal exchange rate official interest rate output payroll taxes Policy private formal sector private investment private sector private urban formal probability of default production profit earners public debt public sector rate on foreign-currency ratio real exchange rate reduced relative risk premium rural sector Share Shift parameter skilled labor skilled workers tax rate tax revenues Turkey Turkish unskilled labor unskilled workers urban formal sector value added World Bank Yeldan