Before 1970s, Turkish Economy sometimes experienced with the problem of inflation but this problem has become persistent after the 1970s and captured the whole economy in 1980 over the rate of 100 %. Some decisions were made in 24 January 1980. Increasing inflation rate become stable after these decisions but never fall under the rate of 25 % so Turkish economy had been affected by inflation and price instability in ten years period. As a result, inflation is the most important problem in Turkish Economy. It must be reduced to provide price stability and fair income distribution. Price stability has become a national aim after the January 1980. In spite of all these things, inflation exists today.

            Prevention of inflation is important for Turkish Economy to create income, benefit of its growth potential, and increase the social welfare and reaching the economic power. Because, inflation is a “sickness” which prevents making good economic decisions,  providing the economic equilibrium and increasing the production capacity. Turkish Economy has changed a lot by providing some steps against the inflation. No precautions were taken deliberately in the public finance. So inflation has started to increase again and the rate has taken the values between 40 – 60 %. Inflation was high but reel economic growth was about 5 %. Inflation rate has come to the intervals between 80 – 100 % with our famous 1994 economic crisis (see Tables 1 and 2).

            Before working on the inflation in the Turkish Economy, it is useful to analyze the causes of inflation. According to some economists, the reason of the inflation is money. If increasing in the money stock is bigger than the increase in the supply of goods and services, then we have inflation. This view is called “monetarist view”[1]. First criticism to this view has come from a Wicksell.[2] To him, determinants of the price changes are the relations between aggregate demand and aggregate supply. General price level is determined from these relations. The inflation theory of Wicksell can be accepted as the combination of microeconomics and macroeconomics.

            After these views, Keynes made an original idea to inflation theory. He studied the relations between macroeconomic analysis tools and supply with effective demand. He accepts that increase in demand will have no effect on increase in prices until the economy

reaches the full employment level. After reaching the full employment level, elasticity of supply goes to zero and prices will go up according to quantity of money.

            The following conclusion can be written for the causes of inflation in Turkey:

a)      The Relationship Between Monetary Stock and Price Level: There should be a

close relationship between monetary stock and the price level in developing countries. In a country where money seems to be the only significant financial asset, and where financial development is in its infancy, it is not difficult to defend such a view. In fact, several empirical investigations are made showing the close relationship between the changes of the stock of money and price changes.

b)      The Economic Policy and Permissiveness: If the scarcity of foreign exchange leads

to an increase in its price, this cost-push factors shift the aggregate supply curve leftwards and the level of national income would decrease. If the government fights lower employment levels, a permissive monetary policy would be pursued. An increase in currency supply makes it possible to return the original starting point although the prices would rise.

c)      An Analysis Emphasizing the Importance of the Public Debt: The dominant role of

the public deficit in determining inflation. The public deficit determines money supply, which has an impact on inflation. Monetary stock depends on the monetary base, previous stock, GNP and the domestic stock of debt, which equals the difference between public expenditure and the public income.

d)      The Market Structure: The structure of market may be influential on inflation.

Especially in monopolistic – oligopolistic markets emerging after protectionary practices, increases in input prices are reflected in prices.

            Many stabilization policies were applied in Turkey to decrease inflation:

a) 1989 – 1991:

Monetary Policy: Central Bank and Treasury made a protocol and they defined a limit to short run advance, which Treasury can get from Central Bank. It was lower than the legal quota. Central Bank confined the money supply by applying a monetary policy that is dependant to Central bank money.

Fiscal Policy:  External debt following was started to decrease external debt. A fiscal program was prepared which considers budget deficit but it could not be applied.

Income Policy:  Only the controlling of the prices of goods and services that is produced by public ventures was aimed. Capital mobility was set free and Turkish Lira was made convertible.

            IMF did not interfere for applying the policy.

b) 1994 – 1995:

Monetary Policy: The short run advance limit, which Treasury can use from Central Bank, was aimed to decrease 3 %. No distinct monetary policy was aimed except this precaution.

Fiscal Policy: Policy gave importance to fiscal precautions. Increasing tax incomes and decreasing public expenditures were aimed.

            Income policy tools were not used and no limitations were put to capital mobility. IMF gave a monetary subsidy to this program.

c) 1997 – 1999:

Monetary Policy: Central Bank and Treasury made a decision about to make short run advance zero and Central Bank will decide the monetary policy alone anymore (1997). Central bank started to follow a monetary police that aimed inflation.

Fiscal Policy: Increasing the collection of taxes was aimed and new arrangements were made to public expenditures. A very good example can be defined as investment expenditure was indexed to privatization incomes. Short run external debt was limited for the first time. An upper limit was defined to Treasury guarantees.

Income Policy: Increase in wages was indexed to prospective inflation. No limitations were put to capital mobility.

            IMF did not interfere to this program, either.

d) 2000 – 2003:

Monetary Policy: A monetary policy was applied that is appropriate to expected inflation policies. A limit was brought to net domestic assets.

Fiscal Policy: Precautions were taken to increase tax incomes for once. Public expenditures and Treasury guarantees were reduced.

Income Policy: Wages, rents and increase in prices were indexed to prospective inflation. No limitations were put to capital mobility.

CONCLUSION

            First three programs were left after a little success to decrease inflation. The most successful program is the third program that can succeed to reduce inflation to 52.2 % from 84.4 %.

Figure 1: Consumer Price Indexes in Turkey

                 Because the second program is aimed to stability more than decreasing high inflation, it has brought a very good success in economic growth. When we look at the average inflation rate, after struggling with inflation in eight years period, we have come to the average as 70.5 % (see Figure 1). Fiscal policy did not work together with monetary policy in 1989-91 program. The most important thing in this program is setting free of the capital mobility. Turkey was away from the problem of balance of payments anymore. 1994-95 program was prepared to develop economic stability. It heavily relied on fiscal policy that aimed taxes more than monetary policy. In 1997-99 program, fiscal policy was applied more powerful than monetary policy.

                 There are some common properties of these programs:

·        Monetary and fiscal policies are not applied together

·        The public was not told enough about the programs

·        There were no interventions to independents of capital mobility.

                 These properties can also be a good reason for high and persistent inflation in Turkey. What about the 2000-2003 program? (see Figure 2).   

Figure 2: Consumer Price Indexes in Turkey (Monthly)

                 It is alike the other programs because capital mobility are set free too and IMF helps to Turkey four times high than the other programs. Struggling with inflation has become a number-one problem, monetary and fiscal policy tools have been applied together and if all people do what they should do for decreasing inflation, we can success.

REFERENCES

·        ÇAKICI, Latif. Türkiye Ekonomisi Nereye Gidiyor. Ankara: Ankara Üniversitesi Basımevi, 1992.

·        HATİBOĞLU, Zeyyat. Economic Theory and Turkish Experience. İstanbul: Literatür Yayıncılık, 1995.

·        KILIÇBAY, Ahmet. Türk Ekonomisinde Enflasyonun Anatomisi. İstanbul: 1984.

·        KUMCU, Ercan. İstikrar Arayışları. İstanbul: Doğan Yayınları, 2000.

·        “Türkiye Ekonomisinin Gündemindeki Konular ve 2000’li Yıllara Bakış”, Bankacılar, (Eylül 1999)

·        ÜLGENER, Sabri. Türkiye’de Enflasyon. İstanbul: 1968.

Table 1: Changes in the Consumer Price Indexes and GDP Growth

  Table 2: Changes in the Consumer Price Indexes and GDP