Effects of Fiscal Policy on Turkey Economy

Fiscal Policy1

Current Fiscal Policy of Turkey1

Credit Markets2

Private Consumption3

Impacts of Business Cycle3

Appreciation of Lira3

Evaluation of Three Fiscal Consolidations4

References6

Effects of Fiscal Policy on Turkey Economy

Fiscal Policy

The three major objectives of the fiscal policy adoption by any government are:

Lower unemployment rates

Stability in prices High and sustainable growth of economy

It depends on the government that it adopts the expansionary or contractionary fiscal policy in order to achieve the above mentioned macroeconomic goals. In case of the expansionary fiscal policy, the government spending is increased significantly, and taxes are lowered in order to encourage the increase in aggregate demand (World Bank 2006). On the other hand, the contractionary fiscal policy is one in which the taxes are increased, and the reduction is made in government spending programs. This ultimately decreases the aggregate demand. At times when inflation is out of control, governments adopt the contractionary policy.

Current Fiscal Policy of Turkey

The current fiscal policy adopted by the Turkish government is expansionary in which the aim of government is to increase the spending in order to provide health benefits as well as development of local cities. According to the official reports, this helps in stimulating the GDP growth which was stated to be extremely low as -5.8% in 2009. He reasons associated with this GDP is the lower petrol prices and the falling imports due to which deficit was reduced to $32 billion. Thus, the lower petrol prices and reduced imports also indirectly affected the aggregate supply in the economy. The supply increased and shifted to right as the expenditure on local municipalities and health increased.

For the country such as Turkey, the spending of government implies a major impact on the economy as the budget deficits go chronic. As a part of the fiscal policy, the spending by government imposes direct as well as indirect effects on the macroeconomic variables. When fiscal policy is relaxed, and government spending is increased, then the aggregate demand also increases (Esfahani and Kim 2002). This increase in demand boosts the output of the economy and price inflation is also stimulated. Thus, the private consumption as well as the investment levels in the economy is affected. However in case of the developing country Turkey, the relationship of the government spending with the associated variables is found to be affected in an asymmetric manner. Thus, the paper analyzes if the fiscal policy of Turkey affects the economy in a different way than on other economies.

Credit Markets

The key factor that affects the impacts of fiscal policy on the economy is the credit market. In Turkey, the capacity of credit markets is constrained. Thus in case of positive shocks to the fiscal policy and particularly the government spending, the demands for loan able funds increase as suggested by the expected steady state trend. This raises the interest rates. Due to increased interest rates, the expansionary government spending shocks are crowded out (Aarle and Garretsen 2003, pp. 217). However it is noticed that the economy does not experience ...