31/03/2023, 23:23 Is Recep Tayyip Erdogan’s monetary policy as mad as it seems?

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Is Recep Tayyip Erdogan’s monetary policy as mad

as it seems?
Most economists think higher interest rates temper inflation. Turkey’s president
disagrees

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Jan 27th 2022

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WHEN INFLATION in your country hovers near 20%, then spikes to 36% in a
month, alarm bells should be going off at the central bank. Not so at Turkey’s,
where the preferred course of action has been inaction. On January 20th, weeks
after the consumer price data was published, the bank’s monetary-policy
committee kept the main interest rate unchanged, at 14%. Turkey’s president,
Recep Tayyip Erdogan, who increasingly runs the bank like a government
agency, has pledged not to raise rates again.
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31/03/2023, 23:23 Is Recep Tayyip Erdogan’s monetary policy as mad as it seems? | The Economist

Conventional economics (and logic) dictates that the way to bring down
inflation is to increase rates. This makes borrowing dearer, limiting growth in
the money supply and curtailing spending and investment. Mr Erdogan,
however, believes that high rates are not a remedy for inflation, but its cause.
“Interest rates are the reason,” he likes to say, “and inflation is the result.” This is
enough to make an economist’s hair stand on end. But is there any method to
Mr Erdogan’s madness?
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Some of Mr Erdogan’s advisers have referred to a theory called neo-Fisherism to

show that their boss’s views are grounded in economics. An equation named
after Irving Fisher, an early 20th century American economist, defines the real
interest rate as the nominal interest set by the central bank, adjusted for
inflation. Assuming the real interest rate is determined by economic
fundamentals that are fixed, then the equation appears to say that higher
nominal rates must lead to higher inflation. Yet most economists view this
argument as a mirage–a bit like saying that because government spending is a
component of GDP, bigger government will always lead to more prosperity.
While nobody disputes the Fisher equation’s definitions, a weighty literature
and decades of experience show that neo-Fisherism is no way to run an
economy–especially one as unstable as Turkey’s.
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31/03/2023, 23:23 Is Recep Tayyip Erdogan’s monetary policy as mad as it seems? | The Economist

Mr Erdogan himself has never brought up the neo-Fisherites. In fact, it is only

recently that he has offered any clue as to what shapes his thinking on interest.
This seems to be not research, but religion. “As a Muslim, I’ll continue to do

what is required by nas,” Mr Erdogan said last December, referring to Islamic

teachings, which forbid the receiving or charging of interest. Although he had
previously called interest rates “the mother of all evil” and part of the “devil’s
triangle”, alongside inflation and exchange rates, this was the first time Mr
Erdogan directly alluded to Islam.

The most likely explanation is that Mr Erdogan has come up with his theory
more or less on his own. Yet the best way to judge it is not by its roots, but by its
results. These have been dismal. Mr Erdogan’s rate cuts caused the Turkish lira
to plunge by 44% against the dollar last year and inflation to reach its highest
level in two decades. Worse may be to come. Instead of an emergency rate rise
that could prevent hyperinflation and offer the currency some breathing room,
new rate cuts seem to be in the pipeline. Even without these, inflation might
soon top 50%. The real interest rate has reached -16%, meaning Turkish banks
are in effect (and generously) paying borrowers to take out new loans. The
country’s finance minister, Nureddin Nebati, sounds thrilled. “You’re taking out
credit at below inflation,” Mr Nebati reportedly told a group of economists on
January 22nd. “We see this as a spectacular success.” Turks, many of whom are
struggling to pay for everyday goods as a result of such policies, might not agree.

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