Dec 18 2017

Erdoğan inflation theory based on 1970s Latin America – columnist

Turkish President Recep Tayyip Erdoğan is espousing a theory about inflation that’s based on arguments for economies in Latin America in the 1960s and 1970s.

A group of economists argued back then that raising interest rates in those countries imposed additional costs on businesses, which were then passed on to the consumer. It’s a theory Erdoğan promotes regularly, wrote Marc Champion, a columnist for Bloomberg.

However, Erdoğan’s inflation theory, namely that higher interest rates create inflation rather than reduce it, ignores Turkey’s predicament – a $40 billion current account deficit and the country’s reliance on foreign credit, Champion wrote.

“The more risky Turkey looks, because it’s engaging in threats and counter-threats and nonsensical economic policies, the more risk that money stops flowing – and that would be very damaging regardless of the source,” said Dani Rodrik, professor of international political economy at Harvard University, according to Champion.

Erdoğan has sought to consistently stimulate the economy, regardless of the level of inflation, Champion said. Such measures included lending $57 billion via a credit guarantee fund earlier this year and a call last week for Turkish employers to hire two extra workers each.

Reducing unemployment, rather than inflation, must be the main target of the government, according to Cemil Ertem, Erdoğan’s chief economic adviser, Champion wrote.

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