Fiscal Imbalances, Capital Inflows, and the Real Exchange Rate: The Case of Turkey

The Turkish economy has opened up substantially over the past 15 years through extensive reforms in the external and financial sectors, while registering relatively high growth rates. Nevertheless, except through the first half of the 1980s, macroeconomic balances have deteriorated almost continuously, with inflation gradually taking a chronic nature, and the economy becoming increasingly dollarized; to a large extent, this deterioration has been a reflection of slow progress in the area of fiscal reform. Despite this mixed record, Turkey began to receive substantial capital inflows in the late 1980s, following the full liberalization of the capital account. These inflows, despite their positive contribution to external account balance, have complicated macroeconomic management considerably, in part owing to their volatile nature.