Turkey at the Crossroads from Crisis Resolution to EU Accession Book

	Preface	vii
I	Overview	1
II	Economic Growth in Turkey, 1960-2000	3
	Recent Growth and Volatility Trends	4
	Correlates of Growth	5
	Cross-Country Regression Analysis	9
	Sources of Policy Volatility	13
	Conclusions	15
III	Turkey's Inflation Process	17
	The Importance of Inflation Expectations	17
	What Determines Inflation Expectations?	19
	Conclusions and Challenges	20
IV	Balance Sheet Developments Since the Crisis	22
	The Effect of Crisis and Recovery on External Assets and Liabilities	22
	Resolution of the Crisis and Recovery of Balance Sheets in Each Sector	24
	Main Links Between Sectoral Balance Sheets and Associated Risks	30
	Conclusions and Policy Implications	32
V	How Much Debt Is Too Much?	33
	Main Features of Turkey's Public Debt	33
	Deterministic Debt Sustainability Exercise	35
	Stochastic Debt Sustainability Exercise	35
	Fiscal Track Record Approach	36
	Empirical Debt Sustainability	36
	Fiscal Dominance of Monetary Policy	37
	Other Considerations	38
	Conclusions	38
VI	Progress and Challenges in Public Debt Management	39
	Improved Debt Structure	41
	Challenges Ahead for Debt Management	42
VII	Lessons from an Empirical Model of Fiscal Policy in Emerging Markets	43
	Debt Sustainability and the Primary Surplus	43
	The Empirical Model	43
	Key Results	44
	The Case of Turkey	46
	Conclusions	48
VIII	Sustainability of the Fiscal Adjustment	49
	Fiscal Adjustments	49
	Defining a "Successful" Adjustment Episode	50
	Conclusions	53
IX	Bank Restructuring and Financial Sector Reform	54
	Crisis Outbreak and Containment	54
	Bank Restructuring Strategy	55
	Outcome of the Bank Rehabilitation Program	58
	Challenges Ahead	59
	Lessons Learned	62
X	Labor Market Developments	64
	Labor Supply	64
	Labor Demand	67
	Labor Market Regulation	69
XI	Conclusions	70
	References	72
	Boxes
9.1	Elements of the Bank Recapitalization Program	57
9.2	The Imar Commission Report	60
9.3	Priority Areas for Legal Reform	61
	Tables
2.1	Real Per Capita GDP Growth, 1960-2000	5
2.2	Growth Accounting, 1961-2000	6
2.3	Summary Statistics, Selected Variables	7
2.4	Cross-Country Growth Difference Regressions	11
2.5	Additional Cross-Country Growth Difference Regressions	11
2.6	Decomposition of Turkey's 20-Year Growth Differential	12
2.7	Decomposition of Turkey's Decadal Growth Differentials	14
2.8	Cross-Country Difference Regressions with Assorted Dependent Variables	14
2.9	Cross-Country Fiscal Volatility Regressions	15
3.1	Determinants of Inflationary Expectations	20
4.1	Extent of Liability Dollarization in Turkey's Economy, end-2003	24
4.2	Foreign Currency Mismatch in the Banking Sector	25