Fiscal imbalances, capital inflows, and the real exchange rate: The case of Turkey

This paper examines the links between fiscal policy, capital inflows and the real exchange rate in Turkey since the late 1980s. The first part provides an overview of recent macroeconomic developments in Turkey. The second part estimates a vector autoregression model linking government spending, interest rate differentials, capital inflows, and the temporary component of the real exchange rate - estimated using three alternative techniques. Positive shocks to government spending and capital inflows lead to a real appreciation, whereas positive shocks to the uncovered interest rate differential lead to a capital inflow and an appreciation of the real exchange rate. Our findings highlight the role of fiscal adjustment for restoring macroeconomic stability in Turkey. (C) 1997 Elsevier Science B.V.