A financial computable general equilibrium model for Turkey: Policy analysis with 1990 data

Although the financial reform experiments of the 1980s have been different for cach specific country that was under taken such reports, in cach ease the increasing interaction between the real and financial sectors has been note worthy. The objective of this study is to analyze the interactions between the real and financial sectors of the Turkish economy within the framework of a financial Computable General Equilibrium (CGE) model based on 1990 data. The model simulates the production, consumption, foreign trade and financial portfolio allocation processes of the cconomy within a simultaneous system of equations. The model is constructed by linking the interactions of the real and financial sub-models which arc related through various channels such as flow of funds, interest rates and monetary policy. The real side of the model follows the standard Walrasian specification of CGE models. In the financial side, portfolio choice of income groups and the financial activity by private sector firms and the public sector arc identified. These agents' financial decisions arc mediated through the financial system, composed of the Central Bank and depository banks. In the financial side nine financial assets and their returns arc identified. In the study, to determine the effects on the cconomy three experiments under two different adjustment mechanisms in the labor market (either the nominal or the real wage of formal labor is assumed to be fixed) arc looked at. These experiments are: 25% increase in the share of the Central Bank advances to the public sector; 50% increase in total nominal public investment expenditure; 20% nominal devaluation of the exchange rate. One of the main conclusions to be drawn from the exercises is that in the case of fixed real wages, the adverse effects of policy changes on the cconomy is much larger compared to the case of fixed nominal wages. Therefore, in the former state, the adjustment bccomcs more costly for all sectors of the cconomy.