A Monetary Disequilibrium Model for Turkey: Investigation of a Disinflationary Fiscal Rule and its Implications for Monetary Policy

In this paper we estimate a monetary disequilibrium model for Turkey based on Khan and Knight's [Khan, M. S., & Knight, M. D. (1981). Stabilization programs in developing countries: a formal framework. IMF Staff Papers, 28, 1-53] framework. Our results show the importance of fiscal discipline in achieving sustainable disinflation. In the long term, however, we conclude that tight fiscal policies should be mixed with monetary and debt management policies to avoid excessive monetary contraction as the real demand for broad money increases with the disinflation process.