Inflation expectations in Turkey: learning to be rational

Turkey implemented an ambitious restructuring of the economy in the past several years, including the adoption of inflation targeting along with a floating exchange rate regime. Inflation came down from almost triple digits to single digits between 2001 and 2005. This particular episode of the Turkish economy sets a genuine case study for investigating the possible changes in the behaviour of inflation expectations upon a regime shift. Accordingly, this study analyses inflation expectations in Turkey, focusing especially on the post-2001 transition phase. We first conduct classical tests of unbiasedness and efficiency using aggregate survey data between August 2001 and October 2007 to get a statistical benchmark for rationality; we find that classical tests reject full rationality hypothesis for all series except next month's Consumer Price Index (CPI) inflation expectations. Then, we carry out Time-Varying Parameter (TVP) estimates based on a Kalman filter to see how the coefficients in the classical test equations evolve over time. This framework allows us to see whether there is convergence to rationality in terms of unbiasedness and efficiency. We find that forecast performance has improved through time, as the coefficients on the test equations shows movement towards values implied by unbiasedness and efficiency hypotheses, supporting the learning hypothesis.     

An interest-rate-spread-based measure of Turkish monetary policy

A coherent method to measure the effectiveness of a monetary policy improves the monetary authority’s management capacity and renders the possibility of applying sound policies prior to and during a crisis. The trend in employing complicated and ambiguity-bearing unconventional monetary tools in the aftermath of the 2008 crisis has increased the value of such a method. The aim of this article is to introduce a coherent and consistent monetary policy evaluation method for Turkey. Accordingly, we suggest that innovations in the spread between overnight interest rates and Treasury auction interest rates are informative for exchange rate, output, and prices. Empirical evidence for this identification reveals that positive innovation in spread (implying a tight monetary policy measure) decreases output temporarily, permanently decreases prices, and appreciates local currency. This result is also robust to alternative specifications.     

Denomination composition of trade and trade balance: evidence from Turkey

The currency denominations of a country's exports and imports are not necessarily the same. If this is the case, then a change in the exchange rate parity among major currencies will affect the trade balance. The empirical evidence provided from Turkey – where exports are mostly denominated in Euros and imports are mostly denominated in USD – suggests that an appreciation of the Euro against the USD would increase the output in the long-run, appreciate the local currency and improve the trade balance for the 1985:01 2003:07 period.     

The heterogeneous impact of taxation on economic development: New insights from a panel cointegration approach

In this paper, we study the role of taxation on long-run income performance. In the theoretical part of the study, we develop a stylized model based on Barro (1990), in which income taxation has two contradictory roles in the standard Solow (1956) setup: on the one hand, taxation appropriates resources that would otherwise be used for physical capital accumulation, and on the other, it is the source of government spending, which is used to support private production. In the empirical part of the study, the impact of consumption tax, personal income tax, corporate profit tax and property tax on income is estimated using the common correlated effects (CCE) panel cointegration approach, which allows for cross-sectional dependencies and provides both panel- and country-specific results. The panel findings for 30 OECD countries for the period of 1995–2016 indicate that only consumption tax has a statistically significant negative effect on long-run income. However, because the type and sign of the tax coefficients are heterogeneous for the country-specific results, we conclude that taxation has heterogeneous effects on income.     

Religion and Economic Development in History: Institutions and the Role of Religious Networks

I argue that the role of religion on economic performance is mainly through the networks of small religious groups. These groups form social networks that enable individuals to conduct non-formal contract enforcement mechanisms. I analyze the effects of religions on societies, focusing mainly on the institutional aspects that affect the capabilities of creating social capital via networks which enhance cooperation and decrease transaction costs. Since the interaction between institutions and organizations is expected to shape the institutional evolution and economic performance of an economy, religions that have a communal form of organization rather than a vertical (hierarchical) structure, thus allowing many different denominational sub-communities within a society, can be more beneficiary for development and growth. Such institutions may not only provide allocative and production efficiency, but also adaptive efficiency that is a key to long-run growth. However, these effects may turn negative depending on these institutions’ role in causing group hostility and exclusion.     

The Role of State‐Owned Enterprises in an Artificial Monopoly Market: The Case of Turkey

State‐owned enterprises (SOEs) benefit from many privileges based on their unique structure, their substantial capital, and their position in the economic system. Like all business corporations, they have no fixed duration, which makes them effectively immortal. In addition, they are adjuncts of the state, which enables them to survive in noncompetitive markets with little effort. Therefore, under today's ruthless global market conditions, SOEs engage in unfair competition with privately financed businesses. By relying on their identity as state operations, they do not follow the rules of the market—they define those rules. In addition to SOEs, which are direct arms of the state, some privately financed businesses dominate markets in which the state allows them to develop an artificial monopoly and thus increase their power day by day. These artificial monopolies distort market processes and create conditions that frequently give rise to corruption. This study examines the problems associated with monopolies, with a special emphasis on establishing more efficient market structures for SOEs in Turkey. The original mission of SOEs was to balance markets through regulation and to be transparent and accountable to the public. Simply striving to meet those criteria would go a long way toward preventing the abuse of power and unfair competition. In addition, SOEs and artificial monopoly markets distort public institutions by promoting rent‐seeking behavior that corrupts politics and blocks innovation from potential competitors. Privatization has been employed by international financial institutions in recent decades, but it has mostly transferred monopolies from the public sector to private owners, which has made the problem worse and done little to enhance competition. Establishing genuinely competitive economies will require a new political culture around the world.     

Follow the Crowd or Follow the Trailblazer? The Differential Role of Firm Experience in Product Entry Decisions in the US Video Game Industry

Firms take cues from their external environment under uncertainty and imitate the actions of others. However, a firm’s own experience may either substitute for these external clues because the firm can evaluate uncertain situations more accurately, or it may complement them because the firm can act more successfully on the external cues. We argue that the type of external cues determines which of the two holds in the context of product entry decisions into market niches. If firms observe a large wave of entrants, own experience conveys more information than the imprecise signal of a mass of other firms. Conversely, if firms observe trailblazers, i.e., highly successful and influential products in a niche, own experience can help firms develop a strategy as a fast follower in a growing niche. We expect the supporting role of own experience in following trailblazers to be especially pronounced in niches that have not been discovered by a large mass of other firms. We study and test our hypotheses in the context of the US PC video game industry between 1991 and 2010 and find support for both the substitutive relationship between own experience and niche popularity and the complementary relationship of own experience and niche trailblazers. However, support for the complementary relationship is limited to less populated niches.     

Success in soccer and economic performance: Evidence from beŞİktaŞ-Turkey

This paper investigates the connection between Turkish industrial production growth and the success of Beşiktaş, which is a popular Turkish soccer team. The empirical evidence provided in the paper suggests that industrial production growth tends to increase with the success of Beşiktaş in European cups. Moreover, if the winnings are in displacement, the increase in industrial production is higher than if the winnings are in the home field. On the other hand, findings on the effects of domestic games on industrial performance are not statistically significant. All the views expressed in this paper belong to the authors and do not represent the views of the Central Bank of the Republic of Turkey or its staff. Beşiktaş, established in 1903, is one of the most popular soccer teams in Turkey. Detailed information about the team can be reached at http://www.besiktasjk.com     

The day of the week effect on stock market volatility

This study tests the presence of the day of the week effect on stock market volatility by using the S&P 500 market index during the period of January 1973 and October 1997. The findings shown that the day of the week effect is present in both volatility and return equations. While the highest and lowest returns are observed on Wednesday and Monday, the highest and the lowest volatility are observed on Friday and Wednesday, respectively. Further investigation of sub-periods reinforces our findings that the volatility pattern across the days of the week is statistically different.(JEL G10, G12, C22)     

Effectiveness of the Financial Ratios in the Determination of the Fraudulent Financial Statements＂ Turkey Practice

Large-scale accounting scandals which were reflected to the world public opinion particularly in the 2000s （such as Enron, Lucent, Xerox, and Parmalat Bank for Reconstruction） carried the matter of fraudulent financial reporting which was made to deceive the financial statement users （Fraudulent Financial Report （FFR）） to the forefront in the agenda of the academicians, operators, and regulatory authorities. As in every crime action, the most effective measure to be taken in preventing FFR events is to try to prevent the FFR before arising. In order to achieve this, in the most effective manner, FFR events should be determined in the formation process. In this study, fraudulent financial statements are tried to be determined by using financial ratios. For this, financial statements of 22 companies which transact in the textile industry in Istanbul Stock Exchange （ISE） were examined. Twenty-three financial ratios were selected for the purpose of determining the risk of fraudulence in the financial statements of the selected companies. These ratios increased in value by multiple regression analysis. The findings which were obtained in the study indicated that some financial statements had the risk of fraudulence. It was concluded that the ratios of inventory/current asset, total debt ratio, and equity turnover rate were a good indicator in the determination of fraudulent financial statements.