NeoFisherian experiment in Turkey: Here we go again

Yesterday Erdogan dismissed the head of the Central Bank of the Republic of Turkey’s, Naci Agbal, and replaced him with professor Sahap Kavcıoglu. In a previous post, I claimed that Turkey has willingly or unwillingly adopted a kind of NeoFisherian policy. In this post, I will discuss this case within the framework of this hypothesis.

During the presidency of Naci Agbal, we witnessed a significant increase in interest rates and the adoption of a tight monetary policy. The main purpose of these policy changes was to lower the exchange rates and give confidence to the markets. Some of these have been successful. In the last few months, we have seen a serious drop in the exchange rate, but it was clear that this would not be sustainable: The Turkish lira began to depreciate again as soon as Erdogan mentioned former Finance Minister, and his son-in-law, Berat Albayrak.

I will not mention here the fundamental problems of Turkey’s economy. In a country like Turkey more fundamental, problems are closely linked to politics. However, these are not covered by this post.

Still, you need to be familiar with current political discourse and ideologies to understand the economy of Turkey. If you look from the outside, perhaps Erdogan and the CBRT will appear as a government that rationally follows NeoFisherian economic policies.

Yet, this is not the case. The dominant faction in Turkey, low rate supporters, justify their views with religion, not economic theory. However, it would not be correct to say that they do not decorate the cake: low foreign exchange value, increase in exports and decrease in imports, and finally cheap labor.

Despite everything, as I argued earlier, Turkey’s economy can be considered a kind of NeoFisherian experiment. Sahap Kavcıoglu made the following statement this morning:

“While the decline in inflation will positively affect macroeconomic stability through the decline in country risk premiums and permanent improvement in financing costs, it will also contribute to the creation of the necessary conditions for sustainable growth that will increase investment, production, exports, and employment.”

In other words, rates will fall.

As I wrote before:

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 NeoFisherian’s to say, “Doh!”

Here I will repeat the same claim. In my opinion, both sides make the fallacy of “reasoning from a price change.” The current political and economic debate in Turkey is almost exclusively done via interest rates and exchange rates. Although interest rates have made no significant changes to monetary policy, it is at the heart of the debate. This debate is not an economic one(discussion on economic theory in Turkey does not make sense for this reason). But what I’m more interested in is what this experiment tells us about interest rates and NeoFisherianism, rather than this debate.

This experiment not only shows that NeoFisherians were wrong and low-interest rates aren’t expansionary. I believe there is more to see. High rates don’t cause inflation, just as low rates do not cause inflation. They are relatively unrelated to other variables in monetary policy. They do not give signals whether the monetary policy is tight or loose. Pretending to be like that means making the fallacy of “reasoning from a price change, “and it’s a cancer cell that spreads the vast majority of your comments on monetary policy.

Fortunately, markets are smart enough to understand this. Unfortunately, it is not possible to say this for Erdogan and his political party.

P.S: Check this out:

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