Disinflation, Fiscal Sustainability, and Labor Market Adjustment in TurkeyThis 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. |
Contents
Introduction | 4 |
Concluding Remarks | 67 |
Variable Names and Definitions | 79 |
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Agénor allocated assumed baserun Bond financing bond rate central bank commercial banks composite input credibility decline deposit rate deviations from baseline disposable income domestic banks Domestic deposits domestic-currency Economic effects equation estimated exports fiscal adjustment Foreign borrowing foreign currency formal sector household government bonds household h increase informal sector infrastructure capital interest payments intermediate consumption labor market lending rate loans long run medium run migration Monetary Nominal wage output percent of GDP Pierre-Richard Policy private formal sector private investment private urban formal probability of default production profit earners public debt public investment public sector rate on foreign-currency ratio real exchange rate risk premium rural sector sector Unskilled Shift parameter skilled labor skilled workers Substitution parameter tax rate tax revenues Turkey Turkish Turkish Lira unskilled labor supply unskilled workers urban formal sector urban informal urban private formal urban unskilled labor World Bank