Lower tax on productive capital or companies may lead to more companies being established and thereby raise potential output. Similarly, lower tax on labour or increased educational inputs may generate an increased supply of labour and also influence wage formation. These are examples of the numerous ways in which changes in tax and expenditure systems are likely to modify economic opportunities and promote conditions for good growth without the attendant capacity shortages that generate price pressure. Current fiscal policy The trade-off between monetary and fiscal policy — the policy mix, as we economists like to say — has improved considerably in the present decade. The rapid accumulation of government debt has ceased and the stock is now being reduced. While the consolidation of government finances has made the fiscal stance restrictive, it has been possible to lower interest rates and this in turn has stimulated investment, economic activity and employment lately. This is accordingly a considerable improvement compared with the early 1990s, for example, when factors such as very weak government finances led the Riksbank to keep interest rates up at a time when government debt was rising markedly. BIS Review 77/1999  2  Government debt and budget balance Per cent of GDP.
In addition, emerging-market rates have become extremely sensitive to global monetary policy developments. To contain repercussions on the Turkish economy, we designed a monetary policy framework composed of a wide interest rate corridor and an active liquidity policy. The CBRT’s wide interest rate corridor and the tight liquidity policy strengthened the resilience of the Turkish economy against global shocks and proved to be effective in pursuing the primary objective of price stability. The wide interest rate corridor enables us to raise shortterm rates temporarily above long-term rates when faced with shocks and to keep the yield curve nearly flat or inverted. Accordingly, Turkish lira-denominated long-term rates remain more stable and the economy becomes less sensitive to global long-term interest rate shocks. Moreover, a flat or inverted yield curve constitutes an effective monetary policy stance that supports disinflation. In fact, especially following the strong monetary tightening of early 2014, we all saw that the sensitivity of domestic markets to global interest rates weakened substantially and core inflation indicators have improved significantly (Chart 7). In the upcoming period, following the start of normalization of global monetary policies, volatility in long-term interest rates may decline permanently thanks to forward guidance policies. According to this baseline scenario, the need for a wide interest rate corridor in our country may diminish over time. In that case, we may simplify the operational framework of the CBRT’s interest rate policy gradually.