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    How can we change 'here' into 'there'?

    Fatih Özatay, PhD01 November 2010 - Okunma Sayısı: 1020


    The reason for the monetary policy tightening here is the loosening there.

    FED President Bernanke is referred to as 'Helicopter Ben'. And the reason for introducing the 'helicopter' prefix along with the global crisis is as follows: The primary step central banks can take to buoy the economy is lowering the short term interest rates under their control. They hope that this way interests on credits and deposits which are of greater importance for the economy will also be reduced. This way they aim to stimulate consumption and investment. But they cannot adopt such a policy if interest rate under their control is already near to zero. In that case, the only alternative to boost domestic demand is to carry out monetary expansion. In economics, an anecdote is told that the purest way of increasing money supply to boost domestic demand is to throw money over cities with a helicopter since central banks receive a return if they inject the liquidity via other methods. 

    FED has thrown around substantial amount of liquidity since September 2008.The size of Bank's balance sheet is now two and a half times larger. Of course the liquidity was not injected with a helicopter drop; but during the crisis FED provided currency to almost everyone in exchange of almost nothing. According to the recent rumours, FED will issue more money. Initial expectations suggested that more than US$1 trillion will be injected into the system. Whereas, more recent estimates state that around US$500 million will be injected. It is maintained that the drop in the expected amount to be injected has led to pessimism in the market. I would like to underline that if the said additional US$500 million, which is deemed unsatisfactory, is injected to the system, FED's balance sheet will grow by 22 percent! What would happen if this amount was injected into the system in two years time in a developing country that has gone through a severe crisis collapsing its financial system? I guess such country could not have turned around for a quite long time. Risk premium would have elevated raising interest rates as well as exchange rates to unprecedented levels. 

    Such is life: We cannot do 'here' what they do 'there'. It is argued that if additional monetary expansion will be pursued, FED will do this in order to reduce the unemployment rate down to the pre-crisis level. Unemployment rate in Turkey has dropped gradually since mid-2009. But the reduction has halted three months ago. Unemployment rate currently stands two points above the pre-crisis level, which was also high.

    Central Bank of the Republic of Turkey (CBRT) does not have the opportunity to act like FED. On the contrary, the said policy of FED gives way to big problems in developing countries, as also discussed before. The excess liquidity there flows toward developing countries. The inflow remains for a short term since it is known that FED's policy is short term. This leads to a credit expansion in the developing countries. Before the end of the year we will hear new decisions from the CBRT; required reserve ratio banks keep at the CBRT in exchange for the TL deposits they collect will be raised. So, the monetary loosening 'there' translates into monetary tightening 'here'. What is more, the exact reason for the tightening here is the loosening there. If we are not happy with this, we have to try changing it. The fundamental question is: How can we change 'here' into 'there'?

     

    This commentary was published in Radikal daily on 01.11.2010

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