Turkish Monetary Policy Panel with CB Governor
I am in Denizli Pamukkale University, attending a daylong seminar.
I’ll talk about the morning sessions later today, but this panel with Central Bank Governor Erdem Basci should be interesting, so I’ll try live-blogging now, but the presentation is at Central Bank website.
The university president just talked about how the decade-long seminars had helped his understanding of Economics. Good for him. Now, they are giving “prizes” (yep that’s what the announcer said) to the founder of the Summer Economics Seminars at Pamukkale University as well as Basci.
The previous university president is moderating. Basci said he just came from Financial Stability Board. He is saying Turkey is hot (he finally accepted overheating).
“I will do a thematic speech. More details will be coming on Thursday. Today, I will speak on financial stability”
Basci thinks yesterday’s decision in Europe is very important; it is fulfilling a very important gap in Europe’s financial stability.
He started by noting that it is not certain whether a fixed exchange rate is fixes. Similarly, a fixed coupon bond- will you get your money back or not. So is it fixed or not?
In G20 Toronto June 2010, it was said a market-based exchange rate would be better.
He showed a graph showing flexible FX rate countries were affected less and recovered more quickly compared to fixed FX. This is because the FX rate helps you out. In Turkey, when you compare 2001 and 2006 crises, in 2001, growth was affected more. In Turkey we got 6000% interest rates in February 2001.
For financial stability, you want more capital for banks but less leverage, but you should not leave that to markets. In G20, FSB, Basel meeting, always ask for more capital from banks. In 2019, Basel III will require more capital.
In Turkey, we shared Financial Stability in fall of last year: We look at leverage ratios for banks and real sector. Also maturity and currency important as well. In 61th government program, there is statement on leverage, which is in line with our approach (ED: so much for CB independence)
Basci is now discussing the relationship between credit spreads and employment- he touched upon this in earlier presentations and has a paper on this. ED: Correlation is not causation + omitted variable bias. Basci says employment did not recover because US has other problems.
Basci is now discussing the paper (Basci Baskaya Kilinc): He says it is a panel study, firm-based, for the U.S. Result: Financial stability affects the masses! This paper will be on our web site until the end of the month. What is theory? It is a shock for debtors and lenders, decreased expected income for both. This is not just an increase in borrowing costs!
What happened in Turkey? Graph on Turkish CDS and industrial employment: We got recovery in employment because there were no other problems.
Basci is now showing the same holds true for Greece, Spain, Portugal.
Yesterday’s decision gave Greece breather + hoping it will stop contagion. EU leaders met so quickly because Italy had a 100bbp increase in borrowing costs in a short amount of time. Our paper showed this could have a big impact on employment.
Policy Proposals on FX regimes and leveraging: Two main themes: 1. To decrease FX fragility, you intervene in excess FX volatility until open positions are eliminated. You need to decrease open positions. 2. You need to ensure a strong capital structure: You need to avoid excess leverage. Until you do that. financial system will be supported.
Yesterday, we had MPC decision: Two new wordings: One of them was in April inflation report: If developed country problems and domestic economic activity in stall, then monetary instruments will be expansionary. Why? Because no inflation threat but financial stability threat. In the decision, we talked about narrowing rate corridor as well as the same statement in the Inflation Report. Both these are related to financial stability.
Can monetary policy contribute to financial stability? Recent events showed financial stability is important. In our Law, financial stability is stated clearly. But central banks should be responsible of financial stability with other institution. Also, central banks can work on both decreasing effects of shocks (conjectural) and softening financial fragilities (structural). The latetr came after the crisis. We are following global developments in G20, FSB and rhe like.
Q&A:
1. Did you the same study for Turkey (spreads employment study)
2.CDS went up to 190 suddenly. So what now? How can we change rate corridor? Can it be inflationary?
3. How do you explain financial stability to the guy on the street?
4. Could we have decreased interest rates before the crisis?
5. People are talking of crisis risk, ministers are saying “don’t consume, save”. You also talked about expansionary monetary policy.
6. We are using inflation targeting. Will we continue with inflation targeting?
Answers:
1. We worked with US data because it is very long. For Turkey, we don’t have many observations.
2. Turkey’s only risk now is current account. But we haven’t seen affect of CDS on employment, but in future, it can decrease in rate of increase of employment. But we look at data from quarter to quarter, which is better. We expect 0% gorwth in 2nd quarter. We are seeing good signs: Import increase stopped, non-energy deficit started to decrease. We expect net exports to contribute positively to growth (compared to previous quarter, not next year). I will leave monetary policy to Inflation Report.
3. The Turkish economy is doing well; maybe it is doing too well. But global risks are almost unimagined. Even riskless U.S. debt is not discussed as risky. It is a brave new world. But Turkey is in abtter position, both in fundamentals and tools to combat. We are ready and clearly saying what we will do. We can clearly say situation is under control.
4. 5. We don’t give policy advice.
6. Inflation targeting will continue FOR SURE. Even the Chinese are discussing inflation targeting. But if we have one target, one tool is enough (Tinbergen rule). But if we will look at financial stability, some central banks will need more tools. But some countries can give financial stability to another institution as well.
The question I could not ask (not that he refused to answer, but I did not have the chance): Econ Minister Zafer Caglayan recently accused the Central Bank of causing the current account deficit to jump. What do you have to say for that?
FIN! I hope you enjoyed it. Sorry for the messy English, but I wanted to get this out ASAP…
One Response to “Turkish Monetary Policy Panel with CB Governor”
Rower32 • July 22nd, 2011 at 1:34 pm
Thanks for posting this! I wish you asked your question. Re fixed vs flexible exchange rates Milton Friedman once said "Pegged exchange rates controlled by an independent central bank are a standing invitation to balance-of-payments trouble. Every crisis in the 1990s, just as every crisis in Canada’s past, was in a country with a pegged exchange rate….floating rates are not a guarantee of sensible internal monetary policy. You can have silly internal monetary policy with fixed rates, you can have silly internal monetary policy with floating rates. All floating rates do is to make it possible for you to have a sensible internal monetary policy without considering the rest of the world." (from his keynote address at the Canadian CB)
