Erdogan's views have been derided by market participants, and some panic ensued, manifested in a depreciation in the Turkish currency. But, apparently Erdogan's ideas aren't coming out of thin air, as his economic advisor Cemil Ertem has written a defense of Erdogan's views, which does a good job of finding the relevant supporting evidence. He cites John Cochrane's work, and speeches by central bankers, including Jim Bullard, that support neo-Fisherite ideas.
So, what's been going on in Turkey? Here's the time series of CPI inflation rates:
What has the Turkish central bank been doing, and what does it propose to do in an attempt to hit its inflation target? From the central bank's most recent Inflation Report:
Given a tight policy stance that focuses on bringing inflation down, inflation is projected to converge gradually to the 5-percent target...And:
...the disinflation process will continue in 2018 due to the decisive implementation of the tight monetary policy and convergence of economic activity and loan growth to a milder growth path.So, that seems like boilerplate central banking. "Tight" monetary policy, i.e. a high nominal interest rate target, will lower inflation, and this disinflationary process will get some help from the Phillips curve, i.e. "a milder growth path" will reduce inflation, according to the central bank.
This is the Turkish central bank's inflation forecast:
So, you might conclude that the Turkish central bank is not capable of reducing inflation. But that's a puzzler. A central bank that could reduce inflation by about 66 percentage points in a two-year period from 2002 to 2004 can't get inflation down from 7% to 5% from 2016 to 2018? What's that about? Well, what did the central bank do to produce the 2002-2004 disinflation? Let's look at the path for short-term interest rates and inflation over the same period as in the first chart. Here I'm using an overnight interbank nominal interest rate (the only short-term interest rate I could find for Turkey - if you know where to find other interest rate data, please let me know):
I'd say President Erdogan isn't as nutty as people are making him out to be - at least in the inflation policy realm. And Turkey is a very interesting example, as it appears to be following the orthodox central banking rulebook: Phillips curve, Taylor rule. There are plenty of countries - Japan being the most extreme - where inflation has been chronically below central bankers' inflation targets, so if Turkey is following the standard rulebook, why is inflation chronically above the inflation target there? Well, that's exactly what mainstream theory predicts. A central banker who blindly follows a Taylor rule (with the Taylor principle in place - more than one-for-one response of the nominal interest rate to changes in inflation) reduces the nominal interest rate target when inflation is low, believing that this will increase inflation, but inflation falls, and the central banker gets stuck in a low-inflation policy trap. Similarly, a Taylor rule central banker who sees high inflation increases the nominal interest rate target, believing that this reduces inflation, but inflation goes up. If the central banker followed the Taylor rule blindly, then inflation would increase indefinitely. But in Turkey's case that may not happen, even without President Erdogan in the mix, due to public resistance to higher interest rates.
There's a lesson here for countries like Canada and the United States, where central bankers are currently hitting their inflation targets. The Bank of Canada and the Fed avoided becoming Japan - falling into the low-inflation policy trap - because they either kept nominal interest rates off zero (Canada), or lifted off from zero (US). But interest rate hikes can be overdone - the risk as that you become Turkey.