How did erdoganomics appear: what economic theory does the Turkish president adhere to

Turkey’s experiment in monetary policy over the past decade, based on the government’s belief that high interest rates cause inflation, has been a failure. This conclusion was reached by economists from the German Center for Financial Research in the review “Exchange rate and inflation in a weak monetary policy: Turkey confirms the theory.” The reduction of the key rate during the period of rising prices led to a sharp depreciation of the lira and the unwinding of the inflationary spiral (last autumn, inflation exceeded 85%). Thus, Turkey confirmed the theory that too loose monetary policy and deviation from the classical model – the Taylor rules – lead to macroeconomic shocks. This could be a lesson for both emerging market and advanced economies about how not to conduct monetary policy, experts say.

The current and future (until 2028) Turkish President Recep Tayyip Erdogan is in favor of lowering the rate as a measure to curb inflation. He believes that producers at high rates are forced to shift their costs to buyers and this leads to higher prices. Despite double-digit inflation rates, the Central Bank of the Republic of Turkey (CBRT) continues to reduce the rate: in 2021 – from 19% to 14%, in 2022 – 9%, in 2023 – to 8.5%. Inflation reached its 24-year high in October 2022 (85.5% y/y) and then began to gradually decline. At the end of April 2023, it dropped to 43.7% compared to April 2022. At the same time, the official inflation target in the country is 5%.