erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Financial Liberalisation and Implicit taxation in Turkey

Konstantinos Kassimastis (Middlesex University, UK)
Aylin Soydan (Istanbul University)

Abstract

The role of financial markets in developing economies has received much attention since the pioneering work of McKinnon (1973) and Shaw (1973). Financial liberalisation - in the form of abolishment of interest rate ceilings - should result in financial deepening which can stimulate growth. While there are some empirical studies which examine the effect of financial liberalisation on growth, the effect of implicit taxation on growth has been overlooked. Implicit taxation can take the form of inflation tax through issuance of currency, or of a tax on the financial market through reserve requirements. According to the financial liberalisation thesis, both these taxes can hinder economic growth by lowering the real rate of interest. This article examines the role of implicit taxation and its effect on economic growth in Turkey, from 1980 until 1999. Turkey abolished interest rate ceilings in the early 1980s, but the rate of inflation has been rather high throughout the 1980s and 1990s. This implies that although interest rates were allowed to be determined by market forces, the government could still affect the real rate of interest through implicit taxation. In the article, first we examine if the Turkish government tried to maximise its inflation tax revenue. To examine this hypothesis we utilise Cagan’s (1956) model of hyperinflation. Although Turkey has not experienced hyperinflation according to Cagan’s definition (more than 50% monthly), his model should still give us an insight into the monetary experience of Turkey. Second, we examine the effect of implicit taxation on economic growth. To this end, we construct proxies for different forms of implicit taxation using the growth in nominal money, inflation and reserve requirements, and test their effect on growth. All variables are expressed as percentages of GDP and we use quarterly data. The methodology we utilise is the one proposed by Jones (1995). We use an ARDL model which allows us to examine not only if any form of implicit taxation had any effect on growth, but also if this effect was permanent or transitory.

Economic Research Center
Middle East Technical University
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e-mail: metuerc@metu.edu.tr