Fiscal Imbalances, Capital Inflows, and the Real Exchange Rate: The Case of Turkey
IMF Working Papers, January 1, 1997
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- Fiscal Imbalances, Capital Inflows, and the Real Exchange Rate: The Case of Turkey
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Bibliographic details
- Authors: E. Murat Ucer, C. John McDermott, Pierre-Richard Agénor
- Published: January 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451841596.001
Overview
- Examines links between fiscal policy, capital inflows, and the real exchange rate in Turkey since the late 1980s.
- Provides an overview of recent macroeconomic developments in Turkey (as of the paper).
- Uses an estimated vector autoregression model linking government spending, interest rate differentials, capital inflows, and the temporary component of the real exchange rate.
- Emphasizes the role of fiscal adjustment in restoring macroeconomic stability.
Methodology
- Empirical approach: vector autoregression model estimated for Turkey.
- Model variables explicitly linked:
- government spending
- interest rate differentials (including the uncovered interest rate differential)
- capital inflows
- the temporary component of the real exchange rate
Key Findings
- Positive shocks to government spending lead to an appreciation of the temporary component of the real exchange rate.
- Positive shocks to capital inflows lead to an appreciation of the temporary component of the real exchange rate.
- Positive shocks to the uncovered interest rate differential lead to:
- a capital inflow, and
- an appreciation of the temporary component of the real exchange rate.
- Overall finding: fiscal adjustment plays a key role in restoring macroeconomic stability.
Policy Implications and Recommendations
- Fiscal adjustment is highlighted as central to restoring macroeconomic stability in the presence of capital inflows and exchange rate pressures.
- Monitoring and managing government spending, interest rate differentials, and capital inflows is important for real exchange rate dynamics.
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- Fiscal Imbalances, Capital Infllows, and the Real Exchange Rate: The Case of Turkey