5

The Coming Short-Termism

WASHINGTON, DC – The inauguration of Donald Trump as US president on January 20 could bring more short-term thinking to economic policymaking in the United States and around the world. If it does, we can expect to see increased tension between official measures and long-term goals, especially for monetary policy, development, and trade.

With respect to monetary policy, I am reminded of when I became Turkey’s Minister of Economic Affairs after the February 2001 financial crash. At that time, one of my first priorities was to bring medium-term inflation down to single digits from the 30-70% range that had prevailed during the previous decade. With great difficulty, we passed a law granting the Central Bank of Turkey independent control over the instruments of monetary policy; the government and the central bank would jointly set the inflation target, which I consider to be the proper arrangement.

In 2001, inflation was going to be near 65%, and the International Monetary Fund wanted Turkey to commit to a 20% target for the following year. Instead, we committed to a 35% target, and surpassed that by bringing inflation down to 30% in 2002.

The takeaway from this story is that the central bank gained credibility. After we had set the 35% target, I visited businesses across the country, and saw that they were all budgeting for a 50-55% inflation rate. When I stressed to them that the target was 35%, they signaled their incredulity with polite smiles. So, when that target was exceeded, the central bank became known as a stable and effective institution that would serve Turkey well for many years.