International Economics: IB Economics

This is an excellent Observer article, looking at the fate of the Turkish economy in the wake of President Erdogan's re-election. Since mid-May, the Turkish lira has fallen by 16% and this has adverse macroeconomic implications - causing inflation, although it seems as though the official inflation rate of 39% under-estimates inflation as it affects Turkish citizens. 

However, because of the unorthodox policy choices made before the election, it seems as though the new government is going to backtrack, with a new Finance Minister seemingly looking to increase interest rates both to support the currency and tackle inflation.

The Turkish monetary authorities raised interest rates by 1% (or 100 basis points) and saw the currency fall in value by 6%. And President Erdogan's argument - that high interest rates have been the cause of inflation - seems somewhat detached from economic reality, with most people being of the view that interest rates are a powerful anti-inflationary tool, if the cause of inflation is demand-pull.

Of course, lowering rates, and the subsequent fall in the value of the currency, is likely to worsen the situation - imports will have become more expensive, and exporters will have less of an incentive to keep their costs in check too. It looks as though the government might have lost control of the economy.

President Erdogan has introduced limited capital controls, as Turkey looks to stem capital flight and prop up the value of the lira. As of now, property transactions must be conducted in lira, rather than foreign currency. This means that foreign currency transactions are only permissible if goods and services are being imported and exported. 

The recent decline in the lira's value comes despite rising interest rates, and the net effect on the Turkish economy has been adverse. You might think about what the likely effects on macroeconomic variables is too.

Larry Elliott with an article looking at the global implications of the ongoing Turkish lira crisis. The Turkish economy is likely to slip into recession, but will it spark speculative activity as investors target other currencies. 

The Turkish lira's on the slide again, with President Erdogan keen to blame external agents for the fact that the currency has declined in the value by 40% in the past year. 

As a result, inflation has surged - and the monetary response has been unorthodox, with interest rates having been cut by 4% to 15% in the past year.

The consensus view is that inflation is set to rise further, and I hope you might be able to explain why a depreciating currency would have an inflationary effect.  

Turkish interest rates have gone up by a whopping 6.25% in an attempt to prop up the lira and it's worked, for now.

The question is whether or not this move is going to restore the country's monetary policy credibility. However, if I were offering President Erdogan some advice, and he seems about as receptive to advice as another Presidential type, maybe not appointing your son-in-law to be Finance Minister might help in this regard.

Mohammed El-Erian writes on the ongoing Turkish crisis and wonders whether the government's unorthodox approach is really going to pay dividends.

Just a heads-up, the fall in the value of the Turkish lira is headline news - and the Guardian, briefly looks at why. 

The issue is not just one that affects Turkey - which it does, and you should be able to think about the macroeconomic consequences for the economy - but has implications for other emerging markets too, and from a broader perspective these might prove to be of greater import.