01 Sep 2004

Financial Aspects of Central Bank Independence and Price Stability

The Case of Turkey

Daniel Gros

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EU-Turkey Working Paper No. 12, 16 pages

Turkey presents a fascinating case study on the potential fiscal consequences of price stability against a background characterised by a combination of recent central bank independence, a difficult path towards price stability, a high degree of dollarisation and a central bank balance sheet burdened with items that have little to do with monetary policy. A number of national central banks (NCBs) in Europe faced similar problems prior to joining EMU (and some of the new EU member countries’ NCBs also face similar problems now), but in Turkey all these issues combine in a mixture that is unique and may lead to serious problems.
Taking the implications of dollarisation into account in the measurement of seigniorage leads one back to the fundamental issue of how to judge monetary policy in a country where the national central bank controls only the money supply in national currency.