Would "cold turkey" work in Turkey?

• Pages: 177-178

Page 177

Over the past decades, a number of developing countries have been plagued by high inflation, a few by hyperinflation. For policymakers, it is a major challenge to bring inflation down while avoiding economic disruption. The critical question they must address is how rapid disinflation should be. A recent IMF Working Paper, "Would 'Cold Turkey' Work in Turkey?" looks at the high and persistent inflation that country has experienced for several decades. To what extent is Turkey's inflation inertial, and would a rapid approach to disinflation work? The authors, Oya Celasun, R. Gaston Gelos, and Alessandro Prati (all from the IMF's Research Department), talk with the IMF Survey about their findings.

IMF SURVEY: How has Turkey, which has had chronic, high inflation since the 1970s, managed to avoid succumbing to hyperinflation?

CELASUN: It's unlikely that there's a single explanation for that; it's more likely that a combination of factors prevented Turkish inflation from reaching hyperinflationary levels. Although our study doesn't specifically focus on that issue, it may shed some light on it. One of our main findings is that backward-looking indexation mechanisms played only a minor role in price setting in Turkey in the 1990s.When indexation is heavily used, as it was in several other high-inflation countries, the effect of an inflationary shock tends to be perpetuated, lasting longer than the duration of the shock itself. Such stickiness in the inflation rate may imply that policymakers have to resort to everincreasing inflation rates to levy an inflation tax.With firms setting prices in a mostly forward-looking manner, such rigidities seem to have been absent in the case of Turkish inflation, which may have helped it avoid hyperinflation.

IMF SURVEY: Turkey's high inflation has been described as inertial.What does this imply for disinflation?

PRATI: The degree of inertia in inflation is an important indication for the speed at which disinflation should proceed. If inertia and backward indexation play an important role in price setting, then the gradualist approach to disinflation is preferable. If, instead, inertia and indexation play a limited role in price setting, there is scope for a more rapid approach. The two approaches differ in terms of output costs, and policymakers want to keep an eye on achieving disinflation while minimizing output costs. That's why having a good assessment of the degree of inertia in price setting...