I could not be as clear as I wanted to be because of space limitations: While I will have a detailed addendum over at the blog soon, let me try to summarize the gist of my argument: If the CBT is cutting the policy rate, then you'd expect the government to enact some fiscal restraint to make up for the Bank's loosening. As I and the Fund are noting, this has not happened despite claims otherwise. Of course, the Bank is saying that, because of the reserve requirement hikes, monetary policy is overall contractionary, but still...Or if liquidity is increasing as a result of the decline in Treasury deposits at the CBT, the CBT should make up by mopping the extra liquidity via open market operations. As you can see in the second graph, this is not happening, either. BTW, although it does not use the word "tandem", the policy incoherence is highlighted in the IMF report as well. And in the column, I was reporting on that report as well as add in my own views, so it's not just me:)
Thursday, February 24, 2011
As is the norm, I want to say add few things to this week's column:
First, I should note that I wasn't all that clear when I said monetary and fiscal policy were not working in tandem. In fact, a reader did ask about that in the comments to the column. Here's my answer to him:
By the way, Haluk Burumcekci, the EFG Securities economist from whom I borrowed the tandem/center-back terminology, used that phrase a long time ago. I haven't been getting his stuff since he moved from Fortis to EFG, so I am not sure if he would agree with me today. But since he is the father of that phrase, I duly referenced him....
Note that the Executive Board discussion is based on the Staff Report, which has not been published- probably because it is probably in negotiation stage between the Treasury and the IMF: These reports are written after "consultation" with the local authorities, meaning that they go back and forth until a consensus is reached. Therefore, the Turkey Staff Report is bound to be softened somewhat before it is published. BTW, this is solely my opinion, so nothing has been leaked to me, although I do know people on both sides of the table. In fact, I would have killed to get a hold of an earlier draft of the report. What I'm trying to say is: If you are journalist, don't make a headline out of this!
BTW, this process is not valid just for Turkey, or only for Staff Reports. In fact, the Independent Evaluation Office, the IMF's Internal Affairs, recently published a report where they were extremely critical of the dealings of the Fund's dealings with British authorities. If you don't feel like reading the whole thing, the FT has a nice summary.
As for some of my other points: Loyal readers would know that I think the Turkish economy is overheating, and although I would say the Fund would more or less agree with me. But this is a highly contested issue, and I have linked to a paper arguing for the opposite view in a recent post.
As for my argument that fiscal policy and liquidity management are the key culprits behind the ballooning current account deficit, Citi Turkey economists have made similar arguments, supported by nice charts, in a recent research note.