The quality of fiscal adjustment: an empirical analysis of Turkey

Turkey is a country with high inflation and debt problems. Policy-makers try to use tight fiscal policy based on high primary surplus to stabilize the economy. This study analyzes the composition of the budget, an indicator for the quality of fiscal policy and the persistence of the adjustments using ARFIMA methodology using monthly data for the period 1994:1 to 2005:11. Our results suggest that fiscal policy implemented in Turkey does not have a high quality due to the composition of expenditures. Although government is successful in cutting personnel expenditures, the results suggest that it did not implement these cuts with persistence. Moreover, decreasing transfer expenditures and a high share in expenditures were not pursued with persistence either. On the other hand, decreasing investment after 2000 both decreases the quality of the fiscal policy and has a future growth cost.