NeoFisherism in Turkey

From the FT:

The Turkish lira led a broad drop in emerging market currencies on Tuesday after President Recep Tayyip Erdogan vowed to take greater control of monetary policy if he wins elections next month.

Mr Erdogan has for years harboured a deep antagonism towards high interest rates, taking the unconventional view that they cause rather than curb inflation. Last week, he warned that they were “the mother and father of all evil”, fuelling concern that he would not allow the central bank the freedom to raise rates.

The Turkish president told Bloomberg that cutting interest rates would lower inflation. “The lower the interest rate is, the lower inflation will be,” he said. “The moment we take it down to a low level, what will happen to the cost inputs? That too will go down . . . you will be able to get the opportunity to sell your products at much lower prices . . . The matter is as simple as this.”

PS.  A new paper by Warwick J. McKibbin and Augustus J. Panton makes the case for NGDP targeting:

Looking to the future the importance of supply shocks being driven by climate policy, climate shocks and other productivity shocks generated by technological disruption as well as a structural transformation of the global economy appear likely to be increasingly important. This suggests an important evolution of the monetary framework may be to shift from the current flexible inflation targeting regime to a more explicit nominal income growth targeting framework. The key research questions that need further analysis are: how forecastable is nominal income growth relative to inflation?; and what precise definition of nominal income is most appropriate given the ultimate objectives of policy (nominal GDP, nominal GNP or some other measure that is available at high frequency (e.g. big data on spending)). Also, the issue of growth of income versus the level of income is an open research question with many of the same issues to be faced as the choice between inflation targeting versus price level targeting.



22 Responses to “NeoFisherism in Turkey”

  1. Gravatar of Benjamin Cole Benjamin Cole
    15. May 2018 at 18:35

    Turkey will be fun to watch. If the Erdogan policy works, we can send kudos to John Cochrane.

    OT: I am banned at EconLog, so I post here on Scoot Sumner’s explanation of why a stronger yen brings about a lower Nikkei 225.

    Sumner is correct in his answer (is is effectively a tighter monetary policy), but seems to overlook another basic:

    Japanese companies are heavy exporters, and when the yen rises, 1) overseas sales decline and 2) earnings and revenue from overseas sales, as reported in yen, also decline.

    So, holding price-earnings ratio constant, a rising yen means lower earnings as reported in yen, and thus lower stock prices.

    We saw a bit of this in the US too, when the dollar weakened a few years back, and overseas earnings, as reported in dollars rose.

    As the dollar has appreciated, we see more US-based earnings reports recently in which public companies discuss sales on some sort of “constant currency” basis, or otherwise explain why reported revenues or earnings are diminished.

  2. Gravatar of Benjamin Cole Benjamin Cole
    15. May 2018 at 18:50

    Add on re Japan:

    “Wednesday’s data marked the end to eight straight quarters of economic expansion, which was the longest sequence of growth since a 12-quarter run between April-June 1986 and January-March 1989 during the asset-inflated bubble economy.

    The economy [in Q1] shrank by 0.6 percent on an annualised basis, a much more severe contraction than the median estimate for an annualised 0.2 percent.”



    Through QE, the Bank of Japan owns 45% on Japan huge sea of national bonds (JGBs).

    I was and maybe still am a supporter of QE. Yes, lower interest rates too, and negative interest rates.

    But at some point one has to adjust to what is happening. Certainly the legitimate question is, “Does QE work?”

    If not, then what are the options?

    We can go to lower negative interest rates, but one cannot force banks to lend when lending looks unprofitable.

    Should Japan go to money-financed tax cuts, as suggested by Ben Bernanke in 2003?

  3. Gravatar of Matthias Görgens Matthias Görgens
    15. May 2018 at 19:13

    Isn’t QE not working even better than QE working?

    Not working being, that your central bank can buy the entire national debt and not drive up inflation. That is essentially already the equivalent of money-financed tax cuts.

    (The only downside is from a real, supply side perspective: we don’t actually want the government to control too much of the economy, even if they could get away with it in a fiscal sense.)

  4. Gravatar of Benjamin Cole Benjamin Cole
    16. May 2018 at 02:55

    Mathias G:

    You raise a fascinating question, that I have raised persistently without answer for years in the econo-blogosphere.

    I call it Mobius-strip economics. The government of Japan owes the national debt to the government of Japan, and inflation is below 1% at latest post.

    Add on: It may be hard for younger people to understand, but there was a time when any inflation rate under 4% was considered good enough, and that was in the Reagan days!

    Today central bankers (and much of the commentariat) get the heebie-jeebies at any inflation rate approaching 2%.

    The RBA seems to do better with a 2% to 3% band.

    So why does not the Fed move to a 2% to 3% band?

    I do not know.

  5. Gravatar of El roam El roam
    16. May 2018 at 03:16

    Interesting , but in order for him , to govern the central bank actually , he would have to change the law. Typically , central bank governor , has independence prescribed by law ( for too many reasons ) . here is the law in Turkey :

    ” The law on the central bank of the republic of turkey”

    And here is Article 4 :

    ” Fundamental duties and powers ”

    Article 4- (As amended by Law No. 4651 of April 25, 2001)
    The primary objective of the Bank shall be to maintain price stability. The Bank shall determine on its own discretion the monetary policy that it shall implement and the monetary policy instruments that it is going to use in order to maintain price stability.

    And further :

    b) The Bank shall determine the inflation target together with the Government and shall, in compliance with this, adopt the monetary policy. The Bank shall be exclusively authorized and responsible in the implementation of the monetary policy.

    And more :

    The Bank shall enjoy absolute autonomy in exercising the powers and carrying out the duties granted by this Law under its own responsibility.

    End of quotation :

    So , unless it has changed or would be changed , there is no way by law , Erdogan can’t directly dictate the interest rates policy ( differentiated from the general range of Inflation ) . It is by the way , totally unacceptable in many states in the world .

    Here the link to the law :


  6. Gravatar of Scott Sumner Scott Sumner
    16. May 2018 at 09:29

    Ben, Don’t reason from a price change. Why does the yen appreciate?

    Matthias, I wrote an article about 15 years ago with the same idea. Why not buy up the entire world?

    El roam, Thanks for the info.

  7. Gravatar of Max Max
    16. May 2018 at 12:40

    “Isn’t QE not working even better than QE working?

    Not working being, that your central bank can buy the entire national debt and not drive up inflation. That is essentially already the equivalent of money-financed tax cuts.”

    When rates are at zero (or the CB is paying interest on reserves), there’s little difference between the CB buying bonds and the CB *borrowing* to buy bonds.

  8. Gravatar of Max Max
    16. May 2018 at 13:00

    Actually we should call the extraordinary “QE” pseudo-QE, because unlike normal everyday QE, it’s not doing anything that the treasury couldn’t do on its own (by reducing sales of long term debt).

  9. Gravatar of Christian List Christian List
    16. May 2018 at 13:19

    Italy might be enthralling to watch as well:

    Five Star and The League want billions of euros of bonds bought up by the ECB as part of its quantitative easing programme to be scrapped.

    Or here:

    The most eye-catching is a €100bn fiscal shot in the arm for the eurozone’s third-largest economy. It would be delivered through a mixture of a big income tax cuts, social security giveaways (including a “citizens’ income”), abolition of Monti-era pension reforms, and a brake on VAT rises due to kick in from 2019.

  10. Gravatar of Benjamin Cole Benjamin Cole
    16. May 2018 at 16:24

    Scott Sumner:

    You pose the question of what would happen if a central bank purchased a very large amount of assets, such as the entire national debt or all the equities on the planet.

    But in real world circumstances, central banks appear only able to purchase some healthy fraction of the national debt or global assets, such as 45% of the national debt in Japan. And they are the outlier.

    So given real world operating constraints, does QE have any effect?

    If QE is only very mildly stimulative, as Fed studies have concluded, then are other options worth investigating?

    Many have said that money financed tax cuts are politically not practical.

    But is QE in a volume large enough to be effective also not politically practical?

  11. Gravatar of Willy2 Willy2
    16. May 2018 at 18:33

    – Mr. Erdogan doesn’t get it. Turkey has a Current Account Deficit of about 10% of GDP. A drop in the lira is the best way to reduce that deficit. It will increase (price) inflation, reduce consumption and as a result of reduced consumption the current account will shrink.
    – But contrary to common belief rising interest rates is deflationary. Falling interest rates is inflationary.

  12. Gravatar of Scott Sumner Scott Sumner
    17. May 2018 at 15:30

    Ben, You said:

    “then are other options worth investigating?”

    Yes, NGDPLT.

    Willy2, That’s two examples of reasoning from a price change in one short comment.

  13. Gravatar of Benjamin Cole Benjamin Cole
    17. May 2018 at 16:29

    Scott Sumner: of course NGDPLT. I salute.

    That is the goal.

    But how to get there, by what tools?

    What if QE is ineffective as used? In the US could the Federal Reserve ever buy 45% of the national debt, or would political forces intervene?

    Is QE, concurrently exploited in conjunction with an increase in federal debt, really just money financed fiscal programs? Michael Woodford seems to think so.

    By advocating QE in times of recession, when the federal debt balloons anyway, are we really just calling for money financed fiscal programs?

  14. Gravatar of James Alexander James Alexander
    17. May 2018 at 21:09

    Ben of the Concrete Steppes? Surely not.

  15. Gravatar of Colin Docherty Colin Docherty
    17. May 2018 at 23:45

    Scott, reminds me of a really interesting piece I read regarding macro:

    Any thoughts on this?

  16. Gravatar of Benjamin Cole Benjamin Cole
    18. May 2018 at 07:46

    Japan April core CUP at 0.4% YOU, and Q1 GDP negative.

    I keep genuflecting to the QE totem…but is a faith-based monetary policy a wise choice?

  17. Gravatar of Willy2 Willy2
    18. May 2018 at 07:52

    – People who understand the difference between Price In-/De-flation and Credit In-/De-flation also understand my previous comment.
    – Does one S. Sumner understand the difference between the two ?
    – Let me give an example. The US. Between 2001 and mid 2008 the USD fell against a bunch of other currencies. Our USD lost e.g. 50% of its value against the EUR in that same timeframe. It meant that US Price Inflation was DOUBLE of what it was in the Eurozone. And this was the main reason that the financial crisis of 2007/2008 (= Credit Deflation) began here in the US and e.g. not in the Eurozone.
    – Did US employees/workers receive a 50% pay increase in that same timeframe to compensate for the rising (price) inflation/falling USD ?

  18. Gravatar of Scott Sumner Scott Sumner
    18. May 2018 at 09:08

    Ben, Why would QE be ineffective under NGDPLT?

  19. Gravatar of Scott Sumner Scott Sumner
    18. May 2018 at 09:11

    Colin, I don’t think John Cochrane would like Erdogan using his name to defined his policies, as John is also a fan of the fiscal theory of the price level. And AFAIK, Erdogan’s fiscal policy is quite inflationary.

  20. Gravatar of Benjamin Cole Benjamin Cole
    18. May 2018 at 16:15

    Ben, Why would QE be ineffective under NGDPLT?–Scott Sumner

    That is a key question to ask. Let’s devise answers. It could be very instructive.

  21. Gravatar of ssumner ssumner
    19. May 2018 at 21:40

    Ben, The answer is “it wouldn’t be ineffective”

  22. Gravatar of Ege Erdil Ege Erdil
    22. May 2018 at 06:55

    Stephen Williamson has a post on neo-Fisherism in Turkey:

Leave a Reply