Description

The Turkish economy is typically characterized as having particularly high real interest rates. Fundamental considerations, such as high growth rates or high returns to capital, do not provide a satisfactory resolution of this puzzle. Instead, we find that two other factors- doubts about the sustainability of disinflation and the existence of a risk premium-have a significant impact on the level of real interest rates in Turkey. Importantly, fiscal policy variables are shown to affect both these factors, suggesting that a more credible and prudent fiscal policy can help reduce real interest rates in Turkey.

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Taxonomy

Economic policy , Fiscal policy , Foreign exchange

More publications in this series: Working Papers

More publications by: Prakash Kannan