23 November 2013
It is time for self-criticism. But please hear my version of story first and then decide. To be continued. If I were you, I had long ago asked myself if it a waste of time reading this column. True, it takes about five minutes to read it, but it’s not just reading. I am sure some of you, particularly after pieces that I talk big about economic prospects, spend some more time thinking on my claims and theories. The year is about to end and I feel the urge to talk about the prospects for 2014. But first I have to give an account of my claims for 2013; without doing that, I think there is no point in talking about 2014.
Partly back to the conventional
21 November 2013
The CB’ decision will increase the predictability of short term market interest rates. From one perspective, this in a sense indicates a return to a more “conventional” policy framework. The Central Bank of Turkey (CB) declared that the interest on overnight interbank operations (short term market rate) will be kept at a level close to the upper limit of the interest rate corridor at 7.75 percent. The CB has the tools and the authority to do this. The banking system is in liquidity shortage and it has to borrow from the CB. Despite this statement, however, the common view is that due to certain technicalities, the average cost of the CB’s lending to banks will stand around 6.75 percent.
Success = Talent + Luck
19 November 2013
Does Turkey implement any anti-inflationary policy that we expect a “permanent” drop in inflation rate? ‘Success = Talent + Luck’ ‘Great success = a little more talent + a lot of luck’. Years ago, the editor of a journal asked a group of scientists to write down their favorite equations. The ones above are Nobel economy prize winner psychologist Daniel Kahneman’s favorites.
The past is gone
16 November 2013
There is a regression to the mean. This is not the fate of Turkey, of course. What we need is to realize that the past is gone and make a fresh new start. It is the middle of November already! How time flies. It feels like just a few days ago that I was planning the year 2013. How is that possible? How did I spend the entire year? Columns, classes, conferences, revisions for new editions of my books Financial Crises and Turkey and Monetary Economics (contains advertisement), a couple of articles, and etc. True, time appears to have run fast for everyone in my age group, but wasn’t it far too fast this time?
As net capital inflow decreases...
14 November 2013
A significant decline in net capital inflow implies hikes in exchange and interest rates and drops in domestic credit growth rate. Turkey spends a large proportion of its national income. With the low domestic savings rate, Turkey has to borrow from abroad at large amounts even to sustain a moderate level of investment at global scale. Here lies the source of vulnerability against net capital movements. This is also the very reason why we talk extensively about the potential decisions the Federal Reserve is to take: those will (and already started to) determine the level of net capital inflow to Turkey.
Why loans go to shopping malls instead of students?
12 November 2013
Why is Turkey’s financial system, which is strong and generous enough to extend million-dollar loans for shopping malls, not as generous when extending student loans? You obviously need machinery for production: turbines, turning machines, pressing machines, cranes etc. These constitute the physical capital. The level of physical capital goes up with investment. This is why we closely follow how investments change in time as it determines not only growth rate at present but also and more importantly the level of output in the future.
Both positive and negative
09 November 2013
Quarterly annual growth rates were so modest that cumulative nine-month figure was lower in 2013 than in 2012. In September industrial output increased by 6.4 percent year-on-year. Monthly figures have been quite volatile recently. In August, for instance, output decreased year-on-year by 1.4 percent. We should not take the monthly changes so seriously.
Condemned to the average
07 November 2013
You can take a month of low inflation and proudly say “we achieved the lowest inflation ratio of the last something years” for instance. I want to share a figure; it will best illustrate what I am trying to tell. It shows monthly inflation realizations since 2009 – there is no need to go back further. The horizontal line represents the average consumer price inflation (CPI) since 2009: 7.6 percent. It is clear that the average level pulls the CPI like a magnet: the levels above and below the mean value prove temporary. The CPI fluctuates around the average line. There is a technical terms for this: mean reversion. If you jump into another literature, you come across the term “inertia” for a similar concept.
Don’t make promises you can’t keep
05 November 2013
One way to end the erosion of monetary policy credibility is to state a higher CPI target. One should either keep his or her promise, or make another one that he or she can keep. There is no middle way. Yesterday inflation figures for October were released. Consumer price inflation (CPI) was recorded at 7.7 percent. More importantly, headline inflation (l indicator) reached as high as 7.5 percent, significantly above the average in recent years.
The inscription on FX notes
02 November 2013
If the sum of consumption and investment is higher than the GDP, current account will be negative, implying that the country did not spend according to its means and hence had a current account deficit.