This paper discusses the robust growth that continues in most Central and Southeastern European economies as well as in Turkey. Accommodative macroeconomic policies, improving financial intermediation, and rising real wages have been behind the region’s mostly consumption-driven rebound, while private investment remained subdued. In the near-term, strong domestic demand is expected to continue supporting growth amid continued low or negative inflation. The Russian economy went through a sharp contraction last year amid plunging oil prices and sanctions. Other CIS countries were hurt by domestic political and financial woes, as well as by weak demand from Russia. In 2016, output contraction is projected to moderate to around 1½ percent from 4¼ percent in 2015 as the shocks that hit the CIS economies gradually reverberate less and activity stabilizes. In the baseline, a combination of supportive monetary policy and medium-term fiscal consolidation remains valid for many economies in the region.
This paper discusses key issues of Turkey’s economy including private savings in Turkey, increase in the minimum wage for 2016, and nonfinancial corporate sector debt in Turkey. Over the last decade and half, Turkey successfully stabilized its macro economy. In the aftermath of the 1999–2001 economic crises, Turkey pursued a highly successful policy of macroeconomic stabilization. At the same time, however, private sector saving rate decreased significantly, leading to a current account deficit. The minimum wage increased by 30 percent in January 2016, affecting about 8 million workers directly. Nonfinancial corporate sector debt has increased substantially in recent years, on the back of increased foreign currency leverage.
This paper explores the contribution of credit growth and the composition of credit portfolio (corporate, consumer, and housing credit) to economic growth in emerging market economies (EMs). Using cross-country panel regressions, we find significant impact of credit growth on real GDP growth, with the magnitude and transmission channel of the impact of credit on real activity depending on the specific type of credit. In particular, the results show that corporate credit shocks influence GDP growth mainly through investment, while consumer credit shocks are associated with private consumption. In addition, taking Brazil as a case study, we use a time series model to examine the role that the expansion and composition of credit played in driving real GDP growth in the past. The results of the case study are consistent with those found in the cross-country panel regressions.
Emerging economies are characterized by higher consumption and real wage variability relative to output and a strongly countercyclical current account. A real business cycle model of a small open economy that embeds a Mortensen-Pissarides type of search-matching frictions and countercyclical interest rate shocks can jointly account for these regularities. In the face of countercyclical interest rate shocks, search-matching frictions increase future employment uncertainty, improving workers’ incentive to save and generating a greater response of consumption and the current account. Higher consumption response in turn feeds into larger fluctuations in the workers’ bargaining power while the interest rates shocks lead to variations in the firms’ willingness to hire; both of which contribute to a highly variable real wage.
This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.
The October 2009 Per Jacobsson Lecture, delivered in Istanbul in conjunction with the 2009 Annual Meetings of the IMF and World Bank, examined the issue of longer-run growth prospects for the global economy following the recent global economic crisis. Will the world be able, in the five to ten years after the crisis abates, to return to the very rapid kind of economic growth sustained in the five years leading up to it? Noting that recent debate on the topic has focused on demand-side factors, neglecting the key area of supply-side sources of growth, Kemal Dervis, the 2009 Per Jacobsson lecturer, argues that contrary to the majority view that limited, below-trend growth is likely to prevail for some time, there is probably potential for very rapid growth in the world economy over the coming decade, thanks to strong supply-side factors. Whether such growth can be realized depends, however, on demand-side management both at the national level and through improved global macroeconomic policy coordination.
This Selected Issues paper discusses the policy response by a sample of central banks to the ongoing oil and food price shocks in South Africa, drawing some lessons, which can help put in context developments in the country. The paper discusses first- and second-round effects of “supply shocks,” and attempts to gauge second-round effects in South Africa. The paper also analyzes the factors that have constrained South Africa’s growth since the end of apartheid, by comparing its GDP components and its saving and investment performance with those of a panel of faster-growing countries.
This Selected Issues paper on Turkey reviews a decline in private saving and adoption of a fiscal rule. As economic confidence has improved, capital inflows have surged while private saving has fallen. Together, these developments have produced current account deficits and a strong lira, raising concerns that Turkey may be exposed to sudden reversals in investor sentiment. A fiscal rule with appropriate mechanisms to monitor its compliance should deliver predictable policies, thus allowing further reductions in debt and risk premiums, thereby contributing to macroeconomic stability.
Emerging market financial crises are abrupt and dramatic, usually occurring after a period of high output growth, massive capital flows, and a boom in asset markets. This paper develops an equilibrium asset-pricing model with informational frictions in which vulnerability and the crisis itself are consequences of the investor optimism in the period preceding the crisis. The model features two sets of investors, domestic and foreign. Both sets of investors learn from noisy signals, which contain information relevant for asset returns and formulate expectations, or "beliefs," about the state of productivity. We show that, if preceded by a sequence of positive signals, a small, negative noise shock can trigger a sharp downward adjustment in investors' beliefs, asset prices, and consumption. The magnitude of this downward adjustment and sensitivity to negative signals increase with the level of optimism attained prior to the negative signal.
The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model's calibration is intuitive and can draw on the vast experience many countries have with calibrating small 'gap' models of monetary policy transmission. Moreover, the definition of the model's steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model's properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.