TüRKİye ekonomi kurumu

Eylül, Çarşamba Wednesday, September 1

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1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 6-Microeconomic Analysis II Workshop 4

Taxing Mobile Capital at Labour’s Peril: WTO’s Corporation Income Tax Policy

JENKINS, Hatice (Eastern Mediterranean University)

JENKINS, Glenn (Eastern Mediterranean University)


Many countries with free trade zones or export processing zones now exempt from corporate income taxation the income of firms exporting from these areas. The WTO has attempted to eliminate this exemption through its rules to promote the non-discrimination of fiscal systems with respect to export production. In particular, these rules do not allow countries to exempt the income of firms exporting from Free Trade Zones from corporate income taxation. This paper examines both theoretically as well as empirically the incidence of removing this corporate income tax exemption. The empirical analysis is carried out for the case of the Dominican Republic. The findings indicate that in the case of the Dominican Republic the removal of the corporate income tax exemption would inflict a burden on labour equal to about 6 times the amount of additional corporate tax revenue collected from the companies operating in its free trade zones.

JEL codes: H22, J31

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 6-Microeconomic Analysis II Workshop 4

On the Optimal Skill Distribution in a Mirrleesian Economy

YAZICI, Hakkı (Sabancı University)

LEUNG, Tin Cheuk (Chinese University of Hong Kong)


A fundamental assumption in Mirrlees (1971) and the literature that follows is that society can only provide redistribution ex post, via transferring consumption between agents. This paper introduces a novel channel of redistribution by allowing planner to choose ex ante distribution of skills and asks: what does the optimal distribution of skills look like? To answer this question we consider a static Mirrleesian economy with two types of agents, high and low. We take the fraction of high and low types as exogenously given and analyze the optimal way to distribute a given level of total skills between these types. We find that it is always socially optimal to choose the perfectly unequal distribution, allocating all the skills to high types and leaving all the low types completely unskilled. We suspect the assumption that there are no complementarities between skilled and unskilled labor is the main reason for this extreme result, which may cast some doubt on other normative results in the Mirrleesian optimal income tax literature.

JEL codes: H21, I28

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 7- Macroeconomic Indicators Workshop 5

Willingness to Produce and Ability to Produce: Business Surveys and Industrial Production Indices

BAŞDAŞ, Ülkem (Middle East Technical University)

ÇELİK, Sadullah (Marmara University)

DENİZ, Pınar (Marmara University)


Business sentiment surveys are conducted to measure the perceptions of company executives on the current economic outlook and future growth path of an economy. In this sense, they are leading indicators of willingness to produce for profit seeking managers. On the other hand, the corresponding proxy for ability to produce in an economy is the level of industrial production. Most of the literature on business sentiment aim to validate the information content of business tendency by building models that incorporate the relationship between these two variables. However, they ignore the continuous nature of the relationship using discrete type analysis. This paper tries to fill this gap by employing spectral density analysis with special emphasis on Breitung and Candelon (2006) test for selected countries over 1985-2009. Besides, we decompose the survey questions according to their forward-looking and backward-looking characteristics in order to compute “current conditions” and “expectations” sub-indices. Our preliminary results indicate that business sentiment indices affect industrial production at shorter horizons in most of the countries whereas industrial production causes business sentiment in longer horizons. On the other hand, there is not a significant difference between “current conditions” and “expectations” sub-indices on economic growth.

JEL codes: C22, D84

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 7- Macroeconomic Indicators Workshop 5

Purchasing Power Parity in Turkish Exchange Rates: Panel Unit Root and Cointegration Tests

NAZLIOĞLU, Şaban (Erciyes University)

GÜLOĞLU, Bülent (Pamukkale University)

İVRENDİ, Mehmet (Pamukkale University)

İSPİR, Serdar (Pamukkale University)


Given the importance of the purchasing power parity (PPP) hypothesis in open economy macroeconomic models and for constructing fundamental equilibrium exchange rates, the long-run PPP relationship has been empirically investigated during the last decade.

The empirical studies to date employ two approaches to test for the validity of the PPP. First and the most common approach utilizes the unit root analysis to investigate whether exchange rates are mean reverting. Since the cointegration approach to the PPP relaxes symmetry and proportionality restrictions imposed by unit root tests on the exchange rates, second way in testing for the PPP hypothesis is to analyze cointegration relationships between exchange rates and relative prices.
Time series unit root and cointegration tests are subject to low statistical power stemming from small sample sizes, thereby more recent studies have paid their attention to re-examine the validity of PPP hypothesis by relying panel data methods. In addition to applying more powerful statistical methods, the recent tendency in the PPP literature is also to control for nonlinearity and structural breaks in the exchange rate series. This study will reexamines the validity of long-run PPP hypothesis using panel data methods for Turkish exchange rates over the period 1980-2010 based on monthly observations. More specifically, we will focus on applying panel unit root and cointegration tests which account for nonlinearity and structural breaks in the exchange rate series. This study makes three contributions to the PPP literature: i) this study is the first to investigate the PPP hypothesis in the case of Turkey by means of nonlinear panel unit root tests. ii) Panel unit root and cointegration approaches employed here account for multiple structural breaks and cross-sectional dependence; finally iii) we provide an empirical approach how to use the panel unit root and cointegration methods in testing the various definitions of the PPP concepts.

JEL codes: F31, C23

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 7- Macroeconomic Indicators Workshop 5

On the Optimal Construction of World Governance Indicators

PINAR, Mehmet (University of Guelph)

STENGOS, Thanasis (University of Guelph)

TOPALOGLOU, Nikolas (Athens University of Economics and Business)


We consider the optimality of the weighting scheme used to construct the World Governance Indicators (WGI) using an approach that relies on consistent tests for stochastic dominance efficiency. We consider consistent tests for stochastic dominance efficiency of a given index portfolio with respect to all possible indices constructed from a set of individual components. The test statistics and the estimators are computed using mixed integer programming methods. The results show that the equally weighted (fixed weights) composite WGI index is not optimal and that each indicator should be weighted differently. We also found that composite index for each indicator is not optimal and each year gets different weighting combinations.

JEL codes: C14, C15

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 7- Macroeconomic Indicators Workshop 5

Analysis of Purchasing Power Parity (PPP) in United Kingdom (1989-2009)

YILDIRIM, Oğuz (Northwestern University, SCS)


In this study, the aim is to analyse the unit root test of Purchasing Power Parity (PPP) hypothesis for United Kingdom (UK) economy using time series analysing methods. Various tests are avaible in the literature. However in this study, the PPP is examined using the unit root tests which is The Augmented Dickey Fuller Test (ADF; 1979, 1981). Using data from the online OECD.Stat database and Bank of England web pages. The test results show some evidence that stationary real exchange rate series can be taken as evidence supporting the validity of PPP. The unit root test results show that the PPP series is a non-stationary series and the 1st-difference of PPP becomes stationarity.

JEL codes: C10

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 8- Economic Analyses: Turkey Workshop 6

The Role of Monetary Policy During the Global Financial Crisis: The Turkish Experience

ALP, Harun (Central Bank of Turkey)

ELEKDAĞ, Selim (Central Bank of Turkey)


This paper develops and estimates a stylized dynamic stochastic general equilibrium model with financial frictions for the Turkish economy. To capture the time-varying spread regarding Turkish external financing, the model incorporates the financial accelerator mechanism introduced by Bernanke, Gertler, and Gilchrist (1999). In addition, to further enhance the fit of the model, following Smets and Wouters (2007), various nominal and real rigidities have been included. In particular, utilizing ten macroeconomic time series and ten structural shocks, the model is estimated over the 2002–2009 period using Bayesian methods. The model seems to fit the data well, which is supported by well behaved dynamics in line with the literature. The estimated structural model is then used to formulate counterfactual experiments which serve to address the following main question: What role did monetary policy play in mitigating the impact of the crisis? The paper considers an encompassing definition of monetary policy which includes financial reforms (which arguably increase the effectiveness of policy transmission), the exchange rate regime, and interest rate policy. As a first pass, the counterfactual experiments focus on the two main shocks of the recent crisis which can be measured using available data: a collapse in global activity and the disruption of international capital markets. While the recession was severe, the analysis indicates that the post-2001 financial reforms and the monetary policy implemented by the Central Bank of Turkey significantly softened the impact of the recent crisis on the Turkish economy. Specifically, according to an intuitive measure, model-based quantitative results indicate that the monetary reforms reduced the output severity of the crisis on the real economy by over 50 percent.

JEL codes: E5, F3

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 8- Economic Analyses: Turkey Workshop 6

Demand for Money: The Turkish Case Revisited With New Definitions

AKBOSTANCI, Elif (Middle East Technical University)

BAŞTAN, Emine Meltem (Middle East Technical University and Central Bank of Turkey) elifa@metu.edu.tr

In 2007, Central Bank of Turkey (CBT) changed the monetary sector and money supply definitions in order to comply with international standards. Those changes took place mainly in three areas: First changes were made in the coverage of monetary and financial institutions (MFI), secondly changes about the location of foreign exchange deposits in the presentation of money supply were introduced. In fact, M1 and M2 were redefined according to the maturity of deposits. Demand and time deposits whether in TL or in foreign currency would take place in M1 and M2, respectively. Finally, official reserves belonging to central government were removed from the money supply presentation. CBT updated the new series starting from December 2005 and stop publishing the old series in December 2007. The demand for money in Turkey has been evaluated in many studies for different time periods and there are two basic analyses made in almost every study. These are determining the relationship among real money demand and its determinants and checking for stability in the relevant time period. These studies focus on different time periods and monetary aggregates, but apart from possible model differences, similar analyses and applications are carried out in order to understand the behavior of money demand. In this study, relationship between money demand and its determinants are investigated for the Turkish economy both in the long and short run. The long run relationship is examined using autoregressive distributed lag (ARDL) cointegration procedure following Pesaran and Shin (2001). This procedure is preferable of other cointegration techniques when variables are integrated of different orders. Stability of the money demand which corresponds to the second pillar of the analysis is checked by CUSUM and CUSUMSQ methods. These methods are preferred to Chow Test because a priori knowledge of possible structural breaks is not required. In general, it is accepted that a typical money demand function should include a measure of real income and the returns on one or more alternatives for money to measure the opportunity cost of money. In this study, the variables over which the money demand is regressed are real income in 1987 prices, quarterly average of deposit rates both in Turkish lira and foreign currencies, average yields on treasury bills, exchange rates of USD, Deutsche Mark, and euro, inflation and inflation expectations. The model also includes dummies for the crisis periods in 1994 and 2001. Dummies representing the introduction of new policies such as inflation targeting are also included. The study covers the period between 1987q1-2009q4. In constructing the version that updates old data with new definitions, required data was not available in electronic database, therefore archive of CBT was appealed and required data was transferred from the printed versions of the old quarterly reports to computer setting. The analysis is expected to shed light on how the change in the monetary definitions affected the stability of money demand. Besides the impact of the financial crisis, change in the behavior of Turkish economic agents in terms of currency substitution is also investigated in this study which will offer essential information to the monetary policy makers.

JEL codes: E41, E52

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 8- Economic Analyses: Turkey Workshop 6

An ARDL Approach for Turkish Phillips Curve

ARABACI, Özer (Uludağ University)


In Turkey, various stabilization programs implemented but high and volatile inflation persist in go on its own characteristics until 2002. The exchange rate based stabilization program which was adopted in December 1999, ended following November 2000 and February 2001 crisis. After these crises, a new strengthened stabilization program has implemented under flexible exchange rate regime. The main target of this stabilization program signed with IMF in May 2001, was squeezing inflation again. After Central bank of Turkey began to implement an inflation targeting regime at the beginning of 2002, inflation has been standing on around single digit rates since 2004. To this end, this paper investigates the differences between pre and post 2002 eras by using an ARDL specification of a Phillips curve model for Turkish economy. In the first stage an ARDL specification is used in order to describe different patterns of inflation for two sub periods. In the second stage, an ARDL model augmented for non-linearities by using a threshold method is used and the null hypothesis of a linear curve tested against piecewise convex and piecewise concave shapes. Paper contributes to the literature by providing an empirical analyze on concave Phillips curve model for Turkish economy for post 2002 period and echo the monopolistic competition under weak demand argued by Stiglitz (1997).

JEL codes: E31, E32

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 8- Economic Analyses: Turkey Workshop 6

The Role of Entrepreneurs in the Formation of Precautionary Saving: Evidence from Turkey

CERİTOĞLU, Evren (Central Bank of Turkey)

I analyse the impact of business income risk on household saving decisions in Turkey. The presence of an entrepreneur in the family might influence household consumption and saving behaviour significantly. The most difficult aspect of empirical research is the approximation of business income risk as a separate category. I propose two similar proxy variables for business income risk, which are based on the variance of entrepreneurial income. It is observed that entrepreneurial income is more volatile than labour income, but entrepreneurial income is also highly volatile among entrepreneurs themselves. Essentially, it is assumed that higher volatility of entrepreneurial income will be associated with a higher saving level according to the precautionary saving hypothesis. The approximation of business income risk can be considered as an innovation in the literature, since it is not predicted as an independent risk category previously.

I use Household Budget Surveys between 2003 and 2008, which are prepared by the Turkish Statistical Institute (TURKSTAT) for Turkey for the empirical analysis. The TUKSTAT Household Budget Surveys are repeated cross-sectional surveys, which provide information on disposable income and consumption figures as well as social and demographic characteristics at the individual and household level. The empirical analysis in this paper is in favour of the precautionary saving hypothesis. Econometric results reveal that business income risk is one of the main determinants of household saving decisions of families, whose head is an entrepreneur. In addition to that, it is observed that there is a positive and statistically significant relationship between household permanent income and household saving. However, it is observed that the share of precautionary saving in total household saving is limited for entrepreneurs in Turkey.

JEL codes: D12, L26

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 9- Gobal Financial Crisis: Country Cases Workshop 7

Austrian Business Cycle Theory and Global Financial Crisis: Some Lessons for Macroeconomic Risk and Financial Stability

BOCUTOĞLU, Ersan (Karadeniz Technical University)

EKİNCİ, Aykut (Development Bank of Turkey)


Austrian Business Cycle Theory (ABCT) presents consistently the origin of the Global Crisis and its contagion mechanism. Therefore ABCT provides Austrian economists with an advantageous position, compared to the other schools, in foreseeing the Global Crisis. The aim of this paper is to analyze the approach of ABCT to the Global Crisis. This paper comes to the conclusions that (i) The basic reason of the crisis is the FED’s low interest rate policy, (ii) The fact that credit booms are encouraged by derivative instruments has substantially increased the destabilizing effects of an artificial credit-expansion policy carried out by keeping the market interest rates below natural interest rates. (iii) The use of low interest rates as an instrument against the crisis may push the economy into new unstable expansion and, following, contraction periods. (iv) CPI is not acting as a leading indicator during business cycles. Therefore, it would be more appropriate to take real-estate, industrial-inputs, energy, and metal prices as indicators of macroeconomic risk.

JEL codes: E30, G01

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 9- Gobal Financial Crisis: Country Cases Workshop 7

Post-Crisis World and Prospects for Small Countries: The Case of the Baltic States

FEDOTOVS, Aleksandrs (Riga International School of Economics and Business Adm.)

SAKALOSH, Oksana (Riga International College of Business Management)

The aim of the paper is to assess the results of European integration and its further prospects from the standpoint of small countries – new members of the European Union. Some generalizations are based upon the case of the three Baltic states – Latvia, Lithuania, and Estonia.

One of the features of globalization since 1990s was increasing number of new states, predominantly small ones – in particular, in Eastern Europe. On the other hand, the trend to integration gained strength, which in Eastern Europe appeared as striving for access to the European Union. The Central- and East European countries cherished exaggerated hopes for quick progress and prosperity due to joining the EU. The Baltic states after 1995 demonstrated impressive economic growth. However, this growth, based mainly on borrowed foreign money, proved illusory. Crash followed during the global economic crisis, and the fall of the Baltic states’ economies proved in its turn the deepest in the EU.

Among the reasons for volatility of economic performance, structural shifts in the Baltic economies should be mentioned. Destruction of manufacturing took place, especially in Latvia, partly under direct pressure from the EU. Enlargement process increased heterogeneity of the European Union. Calculations made by the authors on the basis of coefficient of variation, show no development level equalization within the EU. Single European market facilitated drain of natural and labour resources from less developed countries. Population of the Baltic states consistently decreases since 1990 due to negative natural increase and intensive emigration. Depopulation erodes economic potential of these countries. In the early 1840s, German economist Friedrich List, expressed the opinion that free international trade might lead to total subjugation of lagging nations by the most strong and developed ones. Will it prove to be more difficult for small nations to find their place in the modern world under conditions of national independence than to survive previous centuries of oppression and foreign yoke?

Research methodology is based on application of macroeconomic theory and theory of international economics, analysis of official EU editions, comparison of statistical data, and authors’ own calculations.

Conclusions There is no proof of development level equalization in the EU. At least some of the EU members, such as the Baltic states, face a prospect to remain a poor periphery of Europe for uncertain period of time.

1 Eylül, Çarşamba Wednesday, September 1

Contributed Session 9- Gobal Financial Crisis: Country Cases Workshop 7

Trends in Consumer Confidence of Turkish Households Before, During and After the Global Crisis

HAMSİCİ, Türknur (Central Bank of Turkey)


Given that it is a psychological concept, consumer confidence is difficult to measure, it is a phrase for the opinions and attitudes of consumers about the current and future strength of the economy. Consumer confidence index which is formed by using the consumer survey data can provide a fairly accurate prediction of consumers’ economic behavior. The sparsity of research focused on predictive power of survey data, there has been very little study of their micro foundations. In this article, household micro-level data coming from consumer survey, which is carried out with cooperation of the Central Bank of Turkey (CBRT) and Turkish Statistical Institute (TurkStat), is used. The aim of this study is first to investigate the determinants of consumer confidence and to observe how consumer expectations vary systematically across demographics and socioeconomic groups. Disaggregated consumer confidence data that helps to better understand the economic experiences of various subpopulations can be a useful tool for policy makers, economic analysts, market researcher. Besides, during times of greater uncertainity, as consumers perceive greater risk, they tend to change their economic behavior as savings, investments. This study also searches for the scenery during the 2008-2009 global economic crisis and discusses how the consumer expectations of various subgroups are before and after the crisis.

JEL codes: D10, D84

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