Swimming Against the Tide, Toward a Cliff?

Turkiye has recently risen to 6th place in the global inflation rankings. This policy brief discusses how the choice of monetary policy, as well as the global conjuncture, contributes to the problem. The unusual policy choices used to combat inflation are critically assessed, especially the recent cut of the interest rate.

Then, short-term and medium-term macroeconomic consequences are analyzed. Special emphasis is given to the possibility of a sovereign default, which seems more and more possible with each passing day, as evidenced by the increase in Credit Default Swaps (CDS).

Finally, policy recommendations are discussed. It is argued that "fine-tuning" policy innovations are no longer viable, and structural reforms that improve institutional quality are essential, like restoring the independence of the central bank and the legal system from the executive branch.