ABSTRACT
This chapter examines the basic features of the monetary transmission mechanism in Turkey using a small aggregate macroeconomic model. The relative weights of the alternative sources of financing of an increase in the deficit depends on the decisions made by the fiscal and monetary authorities, and whether these are separated or co-ordinated. The financial crisis of early 1994 shaped the policies of the second half of the 1990s. In its aftermath, measures were taken to gradually reduce political influence on monetary policy and enhance its coordination with fiscal policy. In an effort to control the underlying factors that gave rise to its high-inflation environment, a medium-term disinflation programme was proposed for Turkey for the period 2000-02. Excess deficits do not lead automatically to monetisation in the model, since people assume that the central bank can issue more domestic-currency bonds than are necessary to fund the deficit, providing the bank wants higher interest rates.
