• Martin Tekeli Brogaard

Three Lessons from Turkey’s Inflation Debacle

Updated: Mar 28

A testament to economic theory and a disaster for the Turkish people, Mr Erdogan’s maverick policy experiment may cost him the next election. Economists should take note amid soaring prices at the pump.



2022 has quickly cemented itself as a year of tumultuous markets. While inflationary pressure ripples through the energy sector following Vladimir Putin’s foolhardy invasion of Ukraine, economies worldwide are left with agonising headaches.


The Turkish population, meanwhile, has already become accustomed to double-digit inflation rates, incited and fueled by President Erdogan’s audacious insistence on keeping down interest rates on borrowing. Turkey’s food and energy prices rocketed at their fastest rate in twenty years in February at well above 50 per cent, and the lira tumbled a further 0.8 per cent against the dollar last week, exacerbating the effects of December’s currency crisis. Nevertheless, Mr Erdogan – a self-proclaimed “enemy of interest rates” – has refused to discontinue his unorthodox policies to cool down the economy, to the chagrin of the electorate. The result has been a cost-of-living squeeze, with massive queues at shops for subsidised bread and plummeting real wages.


Like with Mr Putin, the political implications will be severe. Forced to bear the brunt of their president’s zany experiment, voters have become deeply dissatisfied with the state of the economy, with three out of four Turks last month saying the government is mismanaging the economy, according to MetroPoll. While Mr Erdogan continues to deny reality, here are three policy lessons from his fiasco we ought to keep in mind as the world braces for war against inflation.


Some economic fundamentals cannot be defied


Economists are routinely mocked for their inability to foresee macroeconomic hazards. The discipline is certainly far from perfect and could do with some shaking up. Still, as the Turkish president and his enablers have demonstrated, some macroeconomic fundamentals should not be messed with.


ECON101 (and basic logic) states that inflation should be brought down by increasing interest rates, making borrowing dearer and curtailing spending and investment. Running the country’s central bank like just another government ministry, Mr Erdogan has pledged to keep rates low, believing that high rates are not a remedy for inflation, but its cause: “Interest rates are the reason,” he proclaims, “and inflation is the result.” Centuries of empirical evidence suggests otherwise.


His framework is, however, not completely devoid of economic arguments. Keeping down interest rates will likely repel investment in domestic deposits, leading to a depreciation of the lira vis-à-vis other currencies and improving the trade balance (Turkish exports are made cheaper and imports more expensive). Indeed, this has worked in the very short term. Hyperfixated on generating growth, growth and more growth, Mr Erdogan is hoping that this will provide long-run buoyancy for export industries.


But he is mistaken. To allow for long-term growth, foreign investors must also have sufficient confidence in emerging industries and the economy as a whole. Record price instability and unhinged polices will do nothing but shatter Turkey’s foreign reputation amongst investors and consumers.


Keep populists away from monetary levers


In most developed countries, central banks have been granted virtual autonomy over monetary policy. This is done to allow for a cohesive policy framework that can pursue long-term goals independent from corrupting political incentives. For example, expansionary policies tend to bode well with voters ahead of election campaigns, leading to ‘political business cycles’ which can throw the economy out of balance and stir runaway inflation.


Although perfect technocracy should never be favoured, the president’s inflationary gamble illustrates saliently the dangers of handing over excessive policy discretion to elected leaders. In an attempt to sweet talk voters, Mr Erdogan recently said, “as a Muslim, I’ll continue to do what is required by nsa,” referring to Islamic doctrines which forbid the charging of interest.


As the cost-of-living crisis intensifies in light of Turkey’s heavy reliance on Russian oil imports, Mr Erdogan’s attempted tokenism is backfiring. Pulling down inflation is tricky enough with orthodox policy instruments, but a policy reversal would only further undermine the government’s reputation amid brewing public anger. Such a dilemma would never have arisen had the central bank been left to its own devices.


To rein in inflation, reputation matters


Staving off inflation may be challenging, but controlling inflation expectations is much more difficult. Since the financial crisis, quantitative easing (jargon for large-scale asset purchases) had become commonplace. Economists feared that exponential money supply growth would kickstart spiralling inflation, but until 2020, price levels barely nibbed. Much of this – though not all – can be adduced to public confidence in central bankers’ ability to maintain stable price levels.


Suddenly, inflation is back, and the public is feeling increasingly queasy about the trustworthiness of central banks. If trust evaporates further, the effectiveness of any intervention will be doubted and consequently rendered ineffective. Turks have little reason to believe the promises of the CBRT, understandably so. Because of this, even the most drastic policy turnaround will be inefficacious.


If structural problems are allowed to persist in Turkey, the shattering of the central bank’s credibility in bringing down inflation to single digits (or even below 20%) will have disastrous consequences down the line. Policy makers worldwide ought not to repeat such a mistake: the longer it takes to pass resolute intervention, the longer we must wait for expectations to stabilise. Like for the struggling Turkish families forced to stockpile bazlama, waiting any longer may not be affordable.