Similar to other country experiences, in Turkey as well, the positive effects of falling inflation on investments are retarded relative to other effects such as rise in consumption. That is because it takes time for the firms to be convinced that the downward trend in inflation will continue and will be permanent and to make decisions for new investments. Therefore, under falling inflation conditions, it is natural for the firms to tend not to make as much investments as they actually can. In Turkey, despite the economic recovery has a history of three years, investments have just started to increase in the last few months. This is an outcome of the fact that confidence has recently been established that decline in inflation and achievements in inflationary expectations as well as stability established in economy will be lasting. Consequently, while increase in investment demand is an outcome of the falling inflation, sustainability of this increase depends on attaining price stability. Distinguished guests, The second change that came along with the decline in inflation is that as a result of the ease in uncertainties, economic agents were able to foresee longer periods and financial intermediation activities became more active. Within this framework, when we look back to the chronic inflation period, we regret to see that high inflation has led to chronic budget deficits and very high interest rates; caused deterioration in wealth transfer mechanism and forced banking sector to finance the public deficits.
Moreover, these economic agents tend to put the blame on the falling inflation for the worsening of their situation. These economic agents that fail to harmonize with this new process are the ones who resist the most to the fight against inflation. This adaptation problem also prevents these economic agents from seeing the advantages offered by price stability. In this context, the most important development in fight against inflation is that credibility of current policies have improved, whereas the inflation target has increasingly become a more credible nominal anchor for a majority of the economic agents in Turkey. In other words, the inflation target was taken as a reference more extensively. Further developments will facilitate the adaptation of economy to changing dynamics and support maintenance of the price stability as well. Distinguished guests, Before discussing the effects of the falling inflation on economy, let me elaborate the importance of price stability for economies. As we all know, the primary objective of economic policies is to provide sustainable growth and to increase employment throughout the country. The role of monetary policies has been misunderstood for a long time. This wrong assumption is that the increase in inflation and growth are parallel to each other and growth rates can be accelerated by loosening the monetary policy. Frankly speaking, in the framework of early economics literature, this assumption can only be verified in the short term, in countries where inflation rates are low and there is no credibility gap in monetary policies.