A Quarterly Macroeconometric Model of the Turkish Economy

Abstract

This paper aims at describing a small-scale quarterly model for the Turkish economy. It differs from previous work in two respects; (i) the explicit treatment of the expectations in the inflationary process; (ii) the effect of public borrowing on inflation via interest rates. We conclude that expectations have the greatest importance in the determination of inflation along with the exchange rate in Turkey. In addition, to use the overnight interest rate as an effective policy tool, it seems to be essential to accomplish the structural reforms so as to eliminate risk premium due to the concerns about the debt sustainability.