Appendix: The Model
Adams, C, and D. Gros, “The Consequences of Real Exchange Rate Rules for Inflation,” International Monetary Fund Staff Papers, 33 (September 1986), pp. 439–476.
Cuddington, J.T., and J.M. Viñals (a), “Budget Deficits and the Current Account: An Intertemporal Disequilibrium Approach,” Journal of International Economics, 21 (1986) pp. 1–24.
Cuddington, J.T., and J. M. Viñals (b), “Budget Deficits and the Current Account in the Presence of Classical Unemployment,” Economic Journal, 96 (March 1986), pp. 101–119.
Frenkel, J.A., and A. Razin, “The Mundell-Fleming Model A Quarter Century Later,” International Monetary Fund Staff Papers, 34 (December 1987), pp. 567–620.
Heller, P.S., R.D. Haas, and A.H. Mansur, A Review of the Fiscal Impulse Measure, Occasional Paper 44, International Monetary Fund, May 1986.
Henderson, D.W., “Comment,” in The Canadian Balance of Payments: Perspectives and Policy Issues, ed. by D. Purvis, Montreal, Institute for Research on Public Policy, 1983, pp. 222–237.
Khan, M., and R. Zahler, “The Macroeconomic Effects of Changes in Barriers to Trade and Capital Flows: A Simulation Analysis,” International Monetary Fund Staff Papers, 30 (June 1983), pp. 223–282.
This paper was presented at the 44th Congress of the International Institute of Public Finance, held in Istanbul on August 22, 1988, and will be published in a forthcoming book edited by Vito Tanzi. Thomas Mayer contributed to the development of the computational general equilibrium model. Comments by Kemal Dervis, Manuel Guitián and Jürgen Reitmaier are gratefully acknowledged.
For detailed discussion of the adjustment program and the principal lessons derived from it, see Kopits (1987).
For a description of recent financial innovations, see Central Bank of the Republic of Turkey (1988).
In 1986, legislative authority was granted to sell SEEs to the private sector; since then, a number of enterprises have been selected as candidates for privatization.
The share of extrabudgetary funds and local governments in total general government outlays rose from less than one tenth in 1983 to about one fourth in 1987.
The fiscal impulse is equivalent to the annual change in the difference between the cyclically neutral budget balance and the actual budget balance. In turn, the cyclically neutral budget balance is the difference between revenue that bears a constant proportion to actual nominal GNP and expenditure that bears a constant proportion to potential (trend) GNP—the proportions being measured in reference to a base year, for a discussion of the methodology, see Heller, Haas and Mansur (1986).
Although officially recorded exports are believed to be overstated on account of fictitious shipments or over-invoicing by exporters seeking to benefit from various subsidies, there is no hard evidence—based on partner country data—to suggest that such practices are large or that they have intensified in recent years.
However, as observed above, some of the 1984-85 reductions in import duties and deposit requirements, and in export tax rebates, were rolled back or replaced with similar measures in 1986-87.
Herein the focus of attention is the trade account which responds to variations in income and relative prices, rather than the current account, which includes sizeable unrequited transfers consisting almost entirely of remittances by Turkish workers abroad, determined by wage levels in the host country and exchange rate expectations.
The real exchange rate index in Table 1 has been calculated without accounting for the effect of changes in the trade regime, and notably, without allowing for the introduction of the VAT (levied initially at a 10 percent basic rate, raised later by 2 percentage points, and augmented by earmarked taxes and by advance income tax payments by businesses, set at one half of the taxpayers’ VAT liability), adjusted at the border on both exports and imports.
Instances of fluctuations were a 0.7 percent real appreciation in 1985 to dampen inflationary pressures, followed by 16.2 percent real depreciation in 1986, partly to stave off speculation against the Turkish lira in the early part of the year.
A description of the model is provided in the Appendix. An earlier version, including a number of simulations, was presented by one of the authors at a seminar in the Central Bank of the Republic of Turkey on March 20, 1986. For a discussion of similar models and a simulation of the effects of external liberalization, see Khan and Zahler (1983).