The Kapali Carsi

Turkish monetary policy exacerbates inequality

In my previous Hurriyet Daily News (HDN) column, which I also posted here, I illustrated the difference between market and academic economists (or economics columnists) by explaining what the Central Bank should and would do at Thursday’s rate setting meeting.

The Central Bank did cut its policy rate by 50 basis points as expected yesterday, and in my HDN column today, I carried on the style of last time by noting that another difference between monetary and academic economists is their time horizon. And since I am not a market economist anymore, I took a longer-term approach to monetary policy in today’s HDN column by illustrating its impact on competitiveness of Turkish firms and inequality. Anyway, you can read the whole thing at the HDN website, but I would like to add a couple of things on each:

On competitiveness, the easiest way to see the impact of inflation is to disintegrate the change in the real exchange rate as the change in the nominal exchange rate and the inflation differential between Turkey and the rest of the world. Here’s a simple decomposition without world inflation:

If you take inflation for the rest of the world (or Turkey’s peers) constant, you can see that the impact of inflation on the real exchange rate (and thus competitiveness) is higher than that of the nominal exchange rate.

Moving on to inequality, Oner Guncavci, one of the authors of the Tusiad report, has a series of articles on the report (in Turkish) in his blog. The first one is a general discussion. The second one is his answer to economics columnist Suleyman Yasar, a regular feature of my blog as Suluman the Economist in the past when he was writing for pro-government Sabah, who was critical of the report. And the third is on the distribution of labor income and institutionalization. For Turks (or those who speak, or at least read, our beautiful language), I would also recommend his guest op-ed at web-based news portal T24.

Turning to my own column, I would like to point out that the two reports I referenced in the column do not single out lower rates as the sole culprit of the decline in savings. Murat Üçer and Caroline Van Rijckeghem attribute the decline in savings to the post-crisis credit growth and the rise in housing prices, whereas the World Bank report links lower household savings to the “decline in macroeconomic vulnerabilities”: The increased availability of credit, fall in interest rates and postponed consumption more than offset the increase in savings that would be associated with rising incomes.

Note that The Turkish experience with inequality does not fit the well-known Kuznets curve, which predicts a reverse U-shape when you graph inequality against income per capita. On the contrary, a recent IMF paper finds that the Kuznets curve is alive in South America: It could be accounting for as much as two thirds of the decline in inequality there during the last decade.

Finally, a reader suggested the lira depreciation as another source of inequality. It is true that emerging markets like Turkey have a significant exchange rate pass-through to inflation. However, I am not sure which way the effect would go: If richer households consume more imports, then a weaker lira could cause inflation for the rich to actually be higher than inflation for the poor and adecrease inequality. However, if the rich earn a higher share of their income in FX, the effect would be the reverse. We would just have to resort to the empirics…

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