Disinflation, Fiscal Sustainability, and Labor Market Adjustment in Turkey

119 Pages Posted: 13 Jan 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Henning Tarp Jensen

University of Copenhagen - Institute of Economics

Mathew A. Verghis

World Bank - Africa

A. Erinc Yeldan

Bilkent University

Date Written: December 2005

Abstract

This 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.

Suggested Citation

Agenor, Pierre-Richard and Jensen, Henning Tarp and Verghis, Mathew A. and Yeldan, A. Erinc, Disinflation, Fiscal Sustainability, and Labor Market Adjustment in Turkey (December 2005). World Bank Policy Research Working Paper No. 3804. Available at SSRN: https://ssrn.com/abstract=875458

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Henning Tarp Jensen

University of Copenhagen - Institute of Economics ( email )

Studiestraede 6
DK-1455 Copenhagen K
Denmark

Mathew A. Verghis

World Bank - Africa ( email )

1818 H Street
Washington, DC 20433
United States

A. Erinc Yeldan

Bilkent University ( email )

06533 Ankara
Turkey
+90.312.2664000/1659 (Phone)
+90.312.2665140 (Fax)

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