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.

This argument by Dornbusch who is known for his contributions to the international finance literature was initially applicable for developing countries which had a financial and corporate sectors and a treasury that struggled with foreign exchange (FX) liabilities. He was talking about the countries who committed all types of sins in the field of fiscal policy but made effort to keep the exchange rate low due to the mentioned vulnerabilities. However, the theory and experiences stated that exchange rate cannot be kept at such low levels in the presence of a highly distorted fiscal policy. The countries were just trying to prove that their currency is not valuable, that they reflected the economic fundamentals on the contrary and thus are not prone to any crisis. 

The circumstances have changed

No matter what the officials say, such artificial developments go vein and the actual outlook comes to light eventually. Meanwhile, the institutions which fight to the last drop of their blood to convince people to the opposite of what figures say lose their credibility. Of course, the circumstances that shaped Dornbusch's statement have changed. Many emerging market economies have a much healthier economy now.

Even though the circumstances changed, on the other hand, the perception of "vain defense" does not seem to have changed. We still witness different forms of it. The Central Bank of Turkey (CBT), just like the other public institutions responsible for designing and implementing economic policies, lost its reputation after the 2001 crisis. My point is not whether this was deserved or not; but after all the reputation was harmed. It could be build upon a long struggle. When it was realized that the statements and the actions of the CBT corresponded and the actions started to generate results in line with the targets, the institution started to regain its reputation.

Let me put it straight without digging deeper in the issue: We understand why the CBT is concerned about the acceleration of credit expansion. We also understand why you took an unusual action to prevent this and respect your courage. I believe that you also have realized that the path you have been following is not likely to prove fruitful unless it is backed by the actions of other relevant institutions. At least, this risk was frequently highlighted at this column. This theme was addressed continuously since the announcement of the earliest decision of the CBT. My purpose was to make some constructive criticism. 

Choosing silence

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. It will not work. What you must do is to call other institutions and the fiscal policy for action and make effort to slow down the rapid credit expansion in collaboration with them. To choose keeping silent instead of generating one indicator after another and to wait for the new data to evolve in the desired direction. To let the public know that other relevant institutions do not step in, if so. What you must do is not to argue that the pace of credit expansion would not be that high when the average of the movements over a couple of days or when the data is read differently. There blossomed "amusing" reports on these newly invented indicators, which you also most probably read. The reputation, which is prone to facing corrosion, is unfortunately the reputation of the CBT, not certain persons. If it was not, we could have neglected. That reputation was not gained easily, and the loss of it will affect Turkey entirely and adversely.

This commentary was published in Radikal daily on 02.06.2011