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Any Room for Moderate Fiscal Expansion Here?

Wed, Jul 2 2008, 10:49 GMT
by Yapi Kredi Bank Economic Research Department

Yapi Kredi Bank

It is not a rare phenomenon that policy implementation has been misinterpreted, misperceived and thus hopelessly/fruitlessly debated here. Take the IMF program implemented in the aftermath of the devastating 2001 crisis for instance; the foundations of that program were almost unanimously perceived as the usual IMF recipe regarding fiscal and monetary policy: tightness here, tightness there, tightness everywhere. That indeed was neither the recommendation of the Fund nor the implementation. Very tight, not tight, fiscal policy and accommodating monetary policy was the right mix for Turkey and that was indeed the policy pursued until mid- 2006. There are views expressed by those who saw it as such that tightening should have started approximately a year ago, but those are not even tangential to the consensus view that monetary policy had been tight from the very beginning.

The case of monetary policy is thus is a bit perplexing, for all the wrong reasons but perplexing nevertheless. Fiscal policy implementation has been much easier to interpret and deemed commendable by all observers. That very same implementation has been the key driver behind both disinflation and strong growth on this land where fiscal contraction based growth approach was finally given the due credit it deserved. The payoff, as all interested parties would admit, has been beyond contemplation.

Fiscal austerity, maximal primary surplus creation beyond targeted values was the proper approach even if it was not religiously adhered to, but results were gratifying nevertheless. The reduction in gross public sector debt/GDP ratio has been mind boggling as the chart below depicts, and exchange rate vulnerability of debt dynamics was also drastically reduced as also shown below.

The natural question that should pop up at some point is time is at what point could some contribution to economic growth be enjoyed via prudent fiscal expansion. Or equivalently, what is the threshold debt/GDP value below which economic growth dynamics would respond favorably to well-designed fiscal expenditure programs? It is a daunting estimation challenge which we tend to pick up at some point, and we aim to provide less ambitious approach which would nevertheless provide some insight into this issue which has become a hot topic for debate as of late.

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Published on  Wed, Jul 2 2008, 10:51 GMT

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