McKinnon on Argentina’s Monetary Regime

"Argentina’s initial massive depreciation, as measured from the third quarter of 2001 to the second quarter of 2002, was 275 percent—as shown in figure 1. Then by mid 2003, the nominal exchange rate had bounced back somewhat to a depreciation of just 200 percent (from 3Q 2001) and has subsequently remained remarkably stable. Since 2002, the nominal exchange rate has remained at 3 pesos per U.S. dollar, ± 3 percent....If one presumed that the pre-crisis exchange rate in early 2001 was roughly at purchasing power parity, then a sustained 200 percent devaluation (the value of the dollar rises from 1 to 3 pesos) will eventually show up as a 200 percent increase in the domestic price level. Producer prices, which are more directly affected by the exchange rate, will react faster than consumer prices. And by early 2007, producer prices have already risen more than 180 percent while consumer prices rose by just 90 percent. Thus, at 3 pesos to the dollar, Argentina faces several more years of substantial inflation in its CPI before the fixed nominal exchange rate eventually ends it. "

"Korea followed a somewhat different monetary cum exchange rate policy. Following its great crisis of late of 1997-98. To be sure, Korea’s crisis was less intense than what Argentina experienced four years later — at least as measured by the initial depreciation, where the won per dollar rate rose “just” 85 percent (figure 3).... However, the big difference between the two countries in their post-crisis experiences is that Korea opted not to stabilize the nominal value of the won at a highly depreciated level, as Argentina did. Rather the Bank of Korea opted to let the won continue appreciating, albeit somewhat erratically, as shown in figure 3. "

What about Turkey? To understand the rate of change in variables, the graph below is in log terms. "Energy" represents the cost of energy imports.

Fast and Furious !

The average growth rate in the last 5 years was the fastest since 1960. Is this a structural shift or a transient phase?

Figure: Growth Rate of GDP per capita

What Lies Beneath?

If you are looking for the culprit of Turkey's trade deficit, the figure below may give you a clue... Keep in mind that the economy contracted significantly in 1994, 1999, and 2001.

Economy is Creating Jobs - But Not Everywhere !

Figure 1: URBAN POPULATION ... Ratio of employed people to 15 years old and older population





Figure 1: RURAL POPULATION ... Ratio of employed people to 15 years old and older population

What is Wrong with Inflation?

Turkey: Finally some good news on inflation

"Turkey’s State Institute of Statistics has published the May inflation numbers. Turkish consumer prices (CPI) came out at 9.23% y/y (0.50% m/m) - below the consensus expectation of 9.6% y/y. Similarly, producer prices (PPI) were up 7.14% y/y (0.39% y/y) in May - also below the consensus expectation of 7.4% y/y. The downward surprise on CPI mostly reflects lower-than-expected food prices. Over the last couple of months food prices have surprised a bit on the upside - in May we saw a bit of a “mean-reversion” in the food prices.

Overall, this is good news and inflation should drop further in the coming months, but inflation is still likely to remain elevated and significantly above the Turkish central bank’s (TCMB) official inflation target of 4% by the end of the year. We now see inflation around 7-7½% by the end of the year. "

Is that so?

Both CPI and core CPI figures declined in May. The problem is that if we look at other "core inflation measures" like median CPI and trimmed mean, we don't observe any downward trend. On the contrary, the trend is upwards. It seems that the recent drop in inflation owes too much on volatile food prices (which happen to decrease in May).

The inflation report is at best "good news" with an asterix.

Are We There Yet ? (2)

The Republic of Turkey has been a "developing" country from the day it established in 1923. Are getting closer to be a "developed" one?

Let's have a closer look at 1980-2006 period. The first graph compares the growth performance of the Turkish economy with the rest of the world:

Figure 1: Average Growth Rate


It is clear that after a brief period of "above-average" performance following the free market reforms in the early 80s, the Turkish economy fell into a "growth recession" through the 90s. Following the 2001 crisis, the economy has recovered considerably and experienced a 7.2% growth rate.

What is remarkable is that the acceleration in groth rate has been achieved despite the negative shocks in the terms of trade. In the early 80s, the export prices increased, on the average, 2.1% (per year) faster than import prices - which mean that by 1988, the export prices were, in cumulative terms, almost 20% higher as compared to import prices.

In the 2000s, on the other hand, due to rise in energy and commodity prices, the terms of trade have deteriorated (on the average) 1.3% per year. The cumulative change was 8% by 2006.

Asia and East Europe have suffered too, albeit less severe than Turkey. All other developing countries in Africa, Middle East, and South America have experienced a positive shock.

Figure 2: Average Change in Terms of Trade (negative numbers indicate a deterioration)


Figure 3: Average Change in Terms of Trade (negative numbers indicate a deterioration)


Therefore, it is not surprising to observe the deterioration in the current account balances of Turkey. Note that East Europe has also relied on foreign capital flows to finance its growth rate. Asia, on the other hand, has continued to increase its current account surplus thanks to rise in national savings:

Figure 4: Average Current Account Balances (negative numbers indicate current account deficits)


Figure 5: Average Savings Rate (percent of GDP)


What is important is that the Investment-growth ratio, which was peaked at the end of 90s, has declined recently and in par with other developing countries.

Figure 6: The ratio of Investment/GDP to Growth Rate (ten year moving average)