Optimal monetary and fiscal policy mix for price stability and growth: The case for the Turkish economy 2007-2013

During the past two decades financial fragility associated with debt crisis showed the importance of the interaction between monetary and fiscal policies. Price stability has become the principal focus of central banks around the world. Monetary policy will not always to be in a position to control inflation unless supported by fiscal policy. If fiscal policy does not react to government?s debt, monetary policy loses the ability to control the price level. This thesis has attempted to develop an optimal monetary and fiscal policy mix for Turkish economy. Optimal monetary and fiscal policy designs have been initiated and implemented for the Turkish economy over the period of 2007-2013. Optimization experiments have been conducted under fixed and flexible exchange rate regimes. The optimization experiment has been carried out using the optimum control algorithm OPTCON, which is based on a quarterly macroeconometric model of the Turkish economy (TURKPOL). The values of major state variables such as the growth rates of real income (GDP), the inflation rates, the unemployment rates, the budget deficits as percentage of the GDP, the trade balance as percentage of the GDP have been computed for the period of 2007-2013 under the selected constraint variables and the selected exchange rate regime. The simulation results are compared and contrasted to those of the targets of the Turkish state planning organization, the Turkish central bank, and the government?s own targets, whichever is appropriate. The results displayed in thesis provide some major important policy lessons and tools for the policy makers and researchers in the field of macroeconomic policy designing.