Research Article


DOI :10.26650/JECS2021-974653   IUP :10.26650/JECS2021-974653    Full Text (PDF)

The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye

Kaan MasatcıAsuman Oktayer

The Fiscal Theory of the Price Level suggests that in a non-Ricardian regime, an inflation targeting monetary policy will no longer capable of controlling price level, and that optimum policy should always include a combination of monetary and fiscal policies. The aim of this paper is to investigate the dominant fiscal policy regime in Turkey using the ARDL Bounds Testing Approach and to compare the results with actual observations. The review period covers 1996–2019 period using a quarterly data set. Based on the assumption that the actual behavior of the government’s fiscal policy can be observed more accurately with structural balance, the sub-components of primary balance (structural and cyclical balance) are also included in the analysis. During the review period, there were important breaks in the Turkish economy that could lead to changes in monetary and fiscal policies. To observe possible policy changes, rather than dividing the sample into different periods, dummy variables were used to reflect the difference between periods. The results of the analysis demonstrate that structural balance more accurately reflects actual behavior of the government’s fiscal policy. Another finding is that the linear ARDL approach is insufficient to capture the changes in the fiscal policy, especially in periods when the fiscal space narrows.

DOI :10.26650/JECS2021-974653   IUP :10.26650/JECS2021-974653    Full Text (PDF)

Hakim Mali Rejimin Belirlenmesinde Doğrusal Yöntemlerin Gücü: Türkiye İncelemesi

Kaan MasatcıAsuman Oktayer

Fiyat Düzeyinin Mali Teorisi (Fiscal Theory of Price Level, FTPL), enflasyon hedefleme stratejisinin uygulandığı ekonomilerde eğer hakim rejim Ricardocu olmayan ise para politikalarının fiyat düzeyini kontrol etmede yetersiz kalacağını, bu nedenle optimum politikanın her koşulda, para ve maliye politikalarının bir birleşiminden oluşması gerektiğini ileri sürmektedir. Bu çalışmanın amacı, Türkiye’deki hâkim maliye politikası rejiminin ARDL Sınır Testi Yaklaşımının kullanılarak incelenmesi ve elde edilen sonuçların gerçek gözlemlerle kıyaslanmasıdır. İnceleme dönemi 1996-2019 aralığını kapsamaktadır ve çeyrek yıllık veri seti kullanılmıştır. Hükümetin maliye politikasına ilişkin gerçek davranışının yapısal denge ile daha doğru şekilde gözlemlenebileceği varsayımından hareketle, faiz dışı dengenin alt bileşenleri de (yapısal denge ve devresel denge) analize dâhil edilmiştir. İnceleme dönemi boyunca Türkiye ekonomisinde para ve maliye politikalarında değişikliğe yol açabilecek önemli kırılmalar yaşanmıştır. Olası politika değişikliklerini gözlemleyebilmek için örneklemi farklı dönemlere bölmek yerine, dönemler arasındaki farklılığı yansıtacak kukla değişkenler kullanılmıştır. Analiz sonuçları, yapısal dengenin, hükümetin uyguladığı maliye politikasına yönelik gerçek davranışı daha doğru şekilde yansıttığını göstermektedir. Elde edilen bir diğer sonuç, doğrusal ARDL yaklaşımının özellikle mali alanın daraldığı dönemlerde maliye politikasındaki değişimleri yakalamakta yetersiz kaldığıdır.


EXTENDED ABSTRACT


It seems to be widely accepted in the economics literature that monetary and fiscal policies have different objective functions. In this sense, monetary authority is assigned the task of maintaining price stability, and fiscal authority is assigned the task of stabilizing the budget and public debt stock. However, the Fiscal Theory of the Price Level (FTPL) approach, which was proposed in the 1990s, argues that monetary policy alone cannot control the price level in an economy where the fiscal policy is dominant. Leeper (1991), Sims (1994), Woodford (1994, 1995), and Cochrane (1999, 2001), the pioneers of this perspective, claim that price level is determined by a mechanism called the intertemporal budget constraint under certain circumstances:

where, Bt is the government’s nominal liabilities and Pt is price level. FTPL asserts that in a non-Ricardian regime, the government determines future primary surpluses externally and independently (indifferent to debt stock). In such a case, at a given level of debt at the beginning of period t, equilibrium can only be achieved through price level adjustments. This mechanism implies that price level indirectly depends on whether the dominant regime is Ricardian or non-Ricardian. A notable point to emphasize is that even in circumstances in which the government finances the fiscal deficit with future surpluses, fiscal policy can still be “active” as Cochrane (2020) points. According to Leeper (1991), a non-Ricardian regime remains if the government does not exhibit any fiscal reaction to fluctuations in debt stock. Hence, FTPL explains fluctuations in price level according to the dominant characteristics of the economy’s fiscal regime.

The aim of this paper is to determine the Ricardian and non-Ricardian characteristics of fiscal policy in Turkey. Referencing the FTPL approach, it is assumed that once the dominant regime is defined, inflation in Turkey will be better understood; however, fiscal policy is not only a matter of economics, but is also—perhaps predominantly—a political issue, and is therefore subject to change. In an econometric analysis, these political shifts can be captured by dividing the sample into two or more subsamples and separately conducting the analysis for those parts. Rather than using this approach, in this study, dummy variables are used to capture changes in the fiscal policy regime. As for the reasoning behind this approach, previous literature considers the 2001 Financial Crisis in Turkey to be a turning point in economic policies, generally assessing pre- and post-crisis episodes individually. However, in addition to the 2001 crisis, there are two significant events that could have direct effects on fiscal policies. First, the medium-term (three-year) fiscal plan (MTFP) was implemented in 2006. This plan was proposed as an implicit deceleration of Ricardian fiscal policies and should be included in the analysis. Second, the 2008 global financial crisis had a critical impact on economic policies; therefore, since dividing the sample into four parts would be inefficient, dummy variables were used. Moreover, as Cochrane (1999) asserts, government’s fiscal policy behavior can be observed better in structural balance rather than primary balance. The main contribution of this study is the inclusion of structural balance in the analysis along with primary balance to reveal the actual fiscal policy regime.

Nevertheless, some limitations on the power of empirical analysis may remain for analyzing the dominant fiscal regime. The main objective of this study is to assess the strength of a linear model in determining fiscal dominance. A linear method cannot perfectly fit into the analysis as it treats any negative relationship between the debt stock and the primary balance (or structural balance) as a Ricardian regime; however, in real terms, if a rise in the primary balance (or structural balance) causes a decline in the debt stock, one might claim that it is a Ricardian regime. Conversely, if a negative link remains between the two variables, this rule does not apply (decrease in primary balance, increase in debt stock).

We use the ARDL Bounds Testing Approach to test the relationship between the real debt stock and primary balance (structural balance), as this approach is suitable for the time-series properties of our dataset. The results demonstrate that the inclusion of the dummy variables and structural balance are not successful in capturing the regime shifts throughout the investigation period. Both the MTFP in 2006 and the global financial crisis in 2008 seem to be driving toward Ricardian fiscal policies; however, our second analysis, which includes structural balance, reveals the opposite effect. Fiscal policies are found to be structurally non-Ricardian, even after the MTFP. Finally, when we compare the empirical findings with real-life outcomes, particularly since 2017, while the primary balance (and/or structural balance) decreases, public debt stock increases, indicating a negative link between the variables and suggesting a non-Ricardian regime. We conclude that the findings of linear methods may not be reliable during periods when the fiscal room is narrower.


PDF View

References

  • Barro, R. J. (1974). Are government bonds net wealth? Journal of'PoltticalEconomy, 82, 1095-1117. google scholar
  • Barro, R. J. (1989). Interest rate targeting. Journal of Monetary Economics, 23, 3-30. google scholar
  • Bayar, D. K. (2015). Structural fiscal balances in Turkey: Cyclical Fluctuations and Beyond. Amme İdaresi Dergisi, 48(3), 61-93. google scholar
  • Bianchi, F., & Melosi, L. (2017). Escaping the Great Recession. American Economic Review, 4, 1030-1058. google scholar
  • Bouthevillain, C., & et.al. (2001). Cyclically adjusted budget balances: An alternative approach. ECB Working Paper Series, 77. Retrieved from http://hdl.handle.net/10419/152511. google scholar
  • Bölükbaş, M., & Peker, O. (2017). The relationship between price level and fiscal policy in Turkey: An Econometrical Analysis of the FTPL Approach. Maliye Dergisi(172), 1-14. google scholar
  • Canzoneri, M., Cumby, R., & Diba, B. (2001). Is the price level determined by the needs of fiscal solvency? American Economic Review, 91(5), 1221-1238. google scholar
  • Cebi, C., & Özlale, Ü. (2011). Structural budget balance and fiscal stance in Turkey. CBBT Working Paper, 11/11. google scholar
  • Cochrane, J. H. (1999). A frictionless view of U.S. inflation. B. S. Bernanke, & J. Rotemberg içinde, NBER Macroeconomics Annual 1998 (s. 323-421). Boston: MIT Press. google scholar
  • Cochrane, J. H. (2001). Long-term debt and optimal policy in the fiscal theory of price level. Econometrica, 69(1), 69-116. google scholar
  • Cochrane, J. H. (2011). Inflation and debt. National Affairs, 9, 56-78. google scholar
  • Cochrane, J. H. (2020). A Fiscal theory of monetary policy with partially-repaid long-term debt. NBER Working Paper, 26745. google scholar
  • Creel, J., & Bihan, H. L. (2006). Using structural balance data to test the fiscal theory of the price level: Some international evidence. Journal ofMacroeconomics, 28, 338-360. google scholar
  • Dalgıç, B., İyidoğan, P. V., & Balıkçıoğlu, E. (2014). Sustainability of fiscal policy: An empirical examination for Turkish economy. Journal of Business, Economics & Finance, 3(2), 133-147. google scholar
  • Daly, H., & Smida, M. (2014). Fiscal theory of price level. International Journal of Economics, Commerce and Management, II(11), 1-22. google scholar
  • Davig, T., & Leeper, E. M. (2011). Monetary-fiscal policy interactions and fiscal stimulus. European Economic Review, 55(2), 211-227. google scholar
  • Friedman, M. (1968). The Role of monetary policy/ Presidential address delivered at the 80th Annual Meeting of the American Economic Association. American Economic Review, 58, 1-17. google scholar
  • Girouard, N., & Andre, C. (2005). Measuring Cyclically adjusted budget balances for OECD Countries. OECD Economics Department Working Papers(434). https://dx.doi.org/10.2139/ssrn.2005002 google scholar
  • Hodrick, R. J., & Prescott, E. C. (1980). Post war U.S. business cycles: An Empirical investigation. Carnegie-Mellon University Discussion Paper, 451. google scholar
  • Hodrick, R. J., & Prescott, E. C. (1997). Post-war U.S. business cycles: an empirical investigation. Journal of Money, Credit and Banking, 29(1), 1-16. google scholar
  • Kaya, F., & Yılmaz, A. (2013). Elasticity of taxes and structural general government balance in Turkey. https:// dx.doi.org/10.2139/ssrn.2330293 google scholar
  • Kliem, M., Kriwoluzky, A., & Sarferaz, S. (2016). On the low-frequency relationship between public deficits and inflation. Journal of AppliedEconometrics, 31, 566-583. google scholar
  • Koyuncu, F. T. (2014). Causality Network between budget deficit, money supply and inflation: An application to Turkey. International Journal ofBusiness and Social Science, 5(10), 225-235. google scholar
  • Kuştepeli, Y., & Önel, G. (2019). Fiscal deficit sustainability with a structural break: An application to Turkey. Review of Social, Economic & Business Studies, 5/6, 189-208. google scholar
  • Leeper, E. (1991). Equilibria under active and passive monetary policies. Journal ofMonetary Economics, 27, 129147. google scholar
  • Mankiw, N. G., & Reis, R. (2018). Friedman’s Presidential address in the evolution of macroeconomic thought. Journal ofEconomic Perspectives, 32(1), 81-96. google scholar
  • Oktayer, A. (2013). Fiyat düzeyi mali teorisinin Türkiye açısından geçerliliği: Ampirik bir analiz. İktisat Fakültesi Mecmuası, 63(1), 51-79. google scholar
  • Oktayer, A., & Oktayer, N. (2016). Monetary and fiscal policy interactions: An Empirical evidence from Turkey. M. Erdoğdu, & B. Christiensen içinde, Handbook ofResearch on Public Finance in Europe and the MENA Region (s. 447-475). Hershey: IGI Global. google scholar
  • Panjer, N., Haan, L. d., & Jacobs, J. (2017). Is Fiscal policy in the Euro Area Ricardian? DNB Working Paper, 562. google scholar
  • Peseran, M. H., Shin, Y., & Smith, R. J. (1996). Testing for the Existence of a long-run relationship. DAE Working Paper, 9622. google scholar
  • Peseran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal ofApplied Econometrics(16), 289-326. google scholar
  • Sargent, T., & Wallace, N. (1981). Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review(5), 1-17. google scholar
  • Sims, C. (1994). A simple model for study of the price level and the interaction of monetary and fiscal policy. Journal ofEconomic Theory, 4, 381-399. google scholar
  • Sims, C. (1999). Domestic currency denominated government debt as equity in the primary surplus. Latin American Meetings on American Society (s. 1-12). Cancun: Mexico. google scholar
  • Sims, C. (2016). Active fiscal, passive money equilibrium in a purely backward-looking model. Erişim adresi: http://sims.princeton.edu/yftp/FiscalTheoryGreatInflation/BackwardAFPM.pdf. google scholar
  • Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie—Rochester conference series on public policy, (s. 195-214). North-Holland. google scholar
  • Telatar, E. (2002). Empirical Determination of the economic policy regime in Turkey. İktisat İşletme ve Finans, 17(198), 61-70. google scholar
  • Woodford, M. (1994). Monetary policy and price level determinacy in a cash-in-advance economy. Journal of Economic Theory, 4, 345-380. google scholar
  • Woodford, M. (1995). Price level determinacy without control of a monetary aggregate. NBER Working Paper Series, 5204. google scholar
  • Woodford, M. (1996). Control of the public debt: a requirement for price stability? NBER Working Paper, 1-39. google scholar
  • Yurkadul, F., & Saçkan, O. (2007). Genel fiyat düzeyinin belirlenmesinde para ve maliye politikası baskın rejimler. Ankara University SBF Dergisi, 62(2), 219-236. google scholar
  • Zivot, E., & Andrews, D. W. (1992). Further evidence on the great crash, the oil price shock and the unit root hypothesis. Journal ofBusiness and Economic Statistics, 10(3), 251-270. google scholar

Citations

Copy and paste a formatted citation or use one of the options to export in your chosen format


EXPORT



APA

Masatcı, K., & Oktayer, A. (2022). The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye. Journal of Economy Culture and Society, 0(65), 375-394. https://doi.org/10.26650/JECS2021-974653


AMA

Masatcı K, Oktayer A. The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye. Journal of Economy Culture and Society. 2022;0(65):375-394. https://doi.org/10.26650/JECS2021-974653


ABNT

Masatcı, K.; Oktayer, A. The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye. Journal of Economy Culture and Society, [Publisher Location], v. 0, n. 65, p. 375-394, 2022.


Chicago: Author-Date Style

Masatcı, Kaan, and Asuman Oktayer. 2022. “The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye.” Journal of Economy Culture and Society 0, no. 65: 375-394. https://doi.org/10.26650/JECS2021-974653


Chicago: Humanities Style

Masatcı, Kaan, and Asuman Oktayer. The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye.” Journal of Economy Culture and Society 0, no. 65 (Oct. 2022): 375-394. https://doi.org/10.26650/JECS2021-974653


Harvard: Australian Style

Masatcı, K & Oktayer, A 2022, 'The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye', Journal of Economy Culture and Society, vol. 0, no. 65, pp. 375-394, viewed 5 Oct. 2022, https://doi.org/10.26650/JECS2021-974653


Harvard: Author-Date Style

Masatcı, K. and Oktayer, A. (2022) ‘The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye’, Journal of Economy Culture and Society, 0(65), pp. 375-394. https://doi.org/10.26650/JECS2021-974653 (5 Oct. 2022).


MLA

Masatcı, Kaan, and Asuman Oktayer. The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye.” Journal of Economy Culture and Society, vol. 0, no. 65, 2022, pp. 375-394. [Database Container], https://doi.org/10.26650/JECS2021-974653


Vancouver

Masatcı K, Oktayer A. The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye. Journal of Economy Culture and Society [Internet]. 5 Oct. 2022 [cited 5 Oct. 2022];0(65):375-394. Available from: https://doi.org/10.26650/JECS2021-974653 doi: 10.26650/JECS2021-974653


ISNAD

Masatcı, Kaan - Oktayer, Asuman. The Power of Linear Methods in Determining the Dominant Fiscal Regime: A Research on Turkiye”. Journal of Economy Culture and Society 0/65 (Oct. 2022): 375-394. https://doi.org/10.26650/JECS2021-974653



TIMELINE


Submitted26.07.2021
Accepted26.01.2022
Published Online14.03.2022

LICENCE


Attribution-NonCommercial (CC BY-NC)

This license lets others remix, tweak, and build upon your work non-commercially, and although their new works must also acknowledge you and be non-commercial, they don’t have to license their derivative works on the same terms.


SHARE




Istanbul University Press aims to contribute to the dissemination of ever growing scientific knowledge through publication of high quality scientific journals and books in accordance with the international publishing standards and ethics. Istanbul University Press follows an open access, non-commercial, scholarly publishing.