Measures voiced in the debates on hot money flows should not be considered as unilateral.

The news-story of two pages prepared by the Finance Service was titled 'Fight in Words against Hot Money!' Can you fight against such a phenomenon with words? It depends on the words, I believe. If you say something like 'hot money is harmful; we must all fight against it' or something, it will obviously not be much effective. However, if the words declare in advance some measures which will potentially be put in force in a month or even gives strong clues about the decisions without declaring it, it can give desired outcomes as early as today.

Let us put the hot money issue aside for now. 'Fight in Words' is a 'policy tool' employed by central banks.  There also are a number of academic studies on the issue. For instance, a related central bank report or a well planned statement by the governor of the central bank on the eve of the meeting in which short term interest rates will be discussed can make effect even before the decision is actually made. 

What sort of measures?

Therefore, 'communication policy' is also a sort of monetary policy. There are two well-known books on the issue: 'How do Central Banks Talk?' and 'How do Central Banks Write?' First is published in 2001 and the second is in 2003; publication info can be accessed in CEPR website.

Then, does the said news-story in Radikal daily refer to a similar 'fight in words'? Once you read the piece, you directly understand that it is not. You get to know that this specific title was selected exactly for that reason.

But is it possible to fight with hot money with words or with any other means? There are disputing views about it. But there are convincing - if not for all - arguments that such a struggle can be given a chance at least in the short term. This struggle is recommended to be addressed in the context of the 'soundness of financial sector in particular'. What does this mean? To explain it briefly, for instance requiring banks to set aside higher rate of reserves for credits extended to firms which have higher FX denominated debts in comparison with FX denominated assets is a measure of this sort. 

Investors also important

There are two points to take into account here: Such measures must not be considered and implemented 'alone'. For example, if public budget is not disciplined, such measures do not work. Therefore, you first have to create an environment of disciplined fiscal policy where such discipline is sustainable and high quality rather than established temporary through taxes and price raises. In short, suitable environment for the central bank to cut down interest rates must be created. In addition, the current environment must also be investment-friendly facilitating long term foreign capital inflows.

However, would politicians in a country where domestic savings are not enough to secure the desired growth rates want to discourage such capital inflows which create a short term economic stimulation also given that elections are on the way? I am not sure of that. But everyone should analyze cautiously why Turgut Ozal liberalized the capital accounts in 1989-1990 in the face of high budget deficits.

This commentary was published in Radikal daily on 05.12.2010