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    Circumstances for the Central Bank becomes harder
    Fatih Özatay, PhD 07 June 2011
    Why did the CBT reduce policy rate given the scope of uncertainties, the rise in the current account deficit? In the first phase of the implementation of the new policy framework, officials of the Central Bank of Turkey (CBT) referred to two important figures. First shows the "policy rate for financial stability" and "policy rate for price stability" for different output gaps. This figure makes us think that the CBT believes that in the case of rapid improvement in the production level, interest rate required for financial stability will be higher than that required for price stability. This is the aimed scenario: high growth rate, level of production above or rapidly approaching the potential rate of production. The CBT states that an interest rate consistent with the inflation target wil [More]
    Some observations on the academic life
    Fatih Özatay, PhD 04 June 2011
    I am not a specialist in education. I did not conduct any studies on university education, either. I am planning to refer to my experience in these activities. A couple of weeks ago I said that I will address disincentive mechanisms in the academic world and their outcomes; but I postponed writing on this issue. This was a risky decision as it might have raised expectations among the readers of this column that I will present important analysis on the academic life. But this is not a just expectation. [More]
    That reputation was not earned easily
    Fatih Özatay, PhD 02 June 2011
    Please do not refer to senseless indicators in the CBT reports to convince people that the pace of the credit expansion is not that high. Famous and recently deceased economist R. Dornbusch argued that if the central bank of a developing country starts to calculate different real interest rate indices to convince the markets that the currency is not valuable, you can be sure that the currency is actually valuable and the country is faced with serious problems. [More]
    Sometimes it is useful not to forget
    Fatih Özatay, PhD 31 May 2011
    An academic study concluded that many banks did not learn from the 1998 crisis and that the risk culture did not change. A web site I mentioned a couple of times presents the summary of an interesting academic study with an understandable and clear language. The study makes reference to the name of a book that was published during the crisis and was also translated into Turkish. Those interested in financial crises will probably remember the name of the book: "This Time is Different". [More]
    An example of micro reforms
    Fatih Özatay, PhD 28 May 2011
    You can change the written rules overnight; however, it takes a long time to change behavior codes. In last Saturday's commentary, I told that this week I would focus on the disincentive mechanisms that are present in the academic community and the weird outcomes caused by these mechanisms. Nevertheless, I have to postpone this to a later date. I have to settle with the examples about the bureaucracy I provided the last Saturday. It will be wise to give a couple of suggestions on how to remedy this adverse situation. I am interested in incentive mechanisms because they are determined by the institutional structure. Institutional structure is one of the main factors that decide the economic performance of a country. If the economic performance is not much favorable, institutional structure [More]
    Why should we worry?
    Fatih Özatay, PhD 26 May 2011
    We are going through an interesting period, indeed. Such a picture is open to all sorts of developments. The foresighted would take all measures at his/her disposal. There are a number of reasons to be worried. It is wise to list those once again. First, current account deficit has reached high levels. Second, this deficit is financed predominantly with short term capital inflows. Third, short term capital inflows are expected to slow down since the factors enabling the current volume are only temporary: interest rates in developed countries will eventually increase and the monetary expansion that emerged after the global crisis will come to an end. [More]
    Going off halfcocked?
    Fatih Özatay, PhD 24 May 2011
    Measures to limit short term capital inflows can work; but the administration categorically rejects that sort of measures. As of March 2011, current account deficit over the last twelve months have reached a record-high US$ 60.5 billion. It is commonly known that Turkey's current account deficit reaches high levels in periods of rapid growth. We can put this as follows: if you try to ride a car that ideally goes at 120 km/hour at max at 200 km/hour, some components of the engine (the component of current account deficit) start to go bad. The question that really matters here is whether this disturbs and breaks down the entire engine. [More]
    Institutional structure and incentive mechanisms
    Fatih Özatay, PhD 21 May 2011
    Developmental economists define a close link between the institutional structure and economic performance. How individuals are incentivized in an economy is defined by the relevant institutional structure. In other words, written rules, unwritten rules such as habits and traditions, the extent to which these rules are obeyed and the character of the sanctions imposed in the case of the violation of these rules play determinant role in this process. [More]
    Where does Greece head to?
    Fatih Özatay, PhD 19 May 2011
    If you are faced with high public debt, you have to take the most radical steps immediately. Ten days ago Greece's credit rating was cut by 2 levels to B. At the same day, interest on Greece's 10-year bonds reached 15.6 percent compared to 3.1 percent interest rate of Germany's bonds. Everyone knows the cause of this difference: High level of public debt accumulated upon decades of ill fiscal policy experience and the efforts to mask this via several statistical tricks. There are a number of lessons to be learned from Greece's situation. Firsts is that, you should not manipulate the statistics as the curse of the figures eventually takes effect. [More]
    Is this excuse valid?
    Fatih Özatay, PhD 17 May 2011
    In the case with Turkey, the difference between the headline inflation and the consumer inflation will be quite wide if the recent trend proves temporary. For a long time, I talked about the fact that the gap between the consumer inflation and the headline inflation calculated with the "l" index that the Central Bank of Turkey (CBT) pays more attention to. In the last months, a movement in the opposite direction was observed; so I think we would rather get back to this issue. By the way, let me stress that the l index excludes the prices of energy, food, tobacco, alcoholic beverages and gold which are considered to be out of the scope of impact of the monetary policy. [More]