How is that NeoFisherian experiment going in Turkey?

Here’s the Financial Times:

Turkey’s central bank has dented hopes for a return to economic orthodoxy, ignoring calls from many investors to raise its main interest rate and sending the lira to a new record low.

The currency fell more than 2 percent immediately following the decision to keep the benchmark one-week repo rate on hold and instead tweak the cost of borrowing through an obscure emergency facility.

The lira, which has lost about a quarter of its value against the dollar so far this year, teetered on the brink of the symbolic level of 8 to the buck after the decision. It later strengthened to TL7.963.

Actually, I was expecting this. It was clear that Erdogan would not do anything else.

But something else I’m interested in. The TCMB seems to have been following NeoFisherian policies since the mid-2010s. Perhaps you have noticed this by now. So let me refresh your memory. Stephen Williamson wrote this wonderful post in 2018:

In most respects, President Erdogan of Turkey is not known for his progressive instincts, but in economic policy he may be the only convinced Neo-Fisherite on the planet who potentially has any power over monetary policy decisions.

…I’d say President Erdogan isn’t as nutty as people are making him out to be – at least in the inflation policy realm.

…Erdogan’s ideas aren’t coming out of thin air, as his economic advisor Cemil Ertem has written a defense… He cites John Cochrane’s work, and speeches by central bankers, including Jim Bullard, that support neo-Fisherite ideas.

I agree with Williamson on this issue. In fact, I had previously claimed that Yigit Bulut, who is Erdogan’s former economic adviser, was attracted to Neofisherianism. In 2018, Erdogan had told:

that high interest rates cause inflation.

So, how is that NeoFisherian experiment going in Turkey?

Neofisherians claimed that a decision by a central bank to lower its interest rate target or engage in QE is generally expansionary. However, it is not possible to see anything here that can support this claim. But I doubt that it will cause any Neo-Fisherian’s to say, “Doh!”

P.S: Except for that thing, the case of Turkey, in my opinion, illustrates that central banks are often not guided by economic logic, but rather by political considerations.  Mostly central banks will refuse to acknowledge that the weakness of the currency is a result of, for example, bad economic policies and would rather blame the “bad speculators” and “unreasonable” behavior of investors, and FX intervention is hence a way to signal to voters and others that the currency sell-off should not be blamed on bad policies, but on the “speculators”. Do you remember the “interest lobby“?

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kara sican

I don’t think there is a NF experiment in Turkey. CBRT stills reacts to higher inflation by tightening, the problem is a)they are doing too little, too late b)their de facto inflation target(around 10%) is different than their official target(5%). Rate markets still sell-off to higher than expected inflation data, if they believe that CBRT’s reaction function has truly turned Neo-Fisherian than at least they would buy the short-end on higher inflation.

*If markets think NF is invalid theory but know that CBRT believes it then markets would continue pricing higher long term rates as they expect CBRT would back-off at some point and change its reaction function.

Btw I don’t think anyone thinks that CBRT is literally turned NF but people just use this to dunk on NF 🙂

(rte thinks higher rates raise costs of firms then the firms raise their prices rather than the real rate trying to stay constant at the Fisher equation. His adviser probably found Neo-Fisherianism as an ex-post cover up to kiss his…)