[pavlov]

You can look at Turkey, which has chosen to fight inflation by lowering interest rates. Turkey’s president is an autocrat who can make this kind of decision unilaterally and his economic beliefs run counter to the mainstream, so it makes for a fascinating experiment. He’s been lowering rates for two years, from 18% to 8.5%.

The results so far seem to support the economist orthodoxy: inflation in Turkey has ran up to 80% compared to a historical average of about 20% (which was roughly in line with the interest rate when Erdogan started his rate-decrease project.)

[FreeHugs]

But was it the lower interest rate that caused the inflation or the printing of money?

Over what time did the inflation rate go up from 20% to 80% and by what percentage did the money supply change during that time?

[pavlov]

I'm certainly not any kind of expert on Turkey's economy. I'll just link to graphs that show the effects, someone smarter can debate the cause and effect.

The rate cuts in Turkey began in September 2021:

https://tradingeconomics.com/turkey/interest-rate

The inflation rate soared from 20% to over 80% soon afterwards:

https://tradingeconomics.com/turkey/inflation-cpi

It's now stabilized to "only" 55% because of decreased energy price pressures, apparently.

The M2 money supply in Turkish liras is climbing, but not in the same proportion as the rate cuts and inflation:

https://tradingeconomics.com/turkey/money-supply-m2

Turkey has also been spending its foreign currency reserves to prop up the lira. They've experimented with extraordinary measures like a government guarantee to protect Turkish account holders against currency depreciation, in an effort to make people keep liras in banks rather than hard currency:

https://www.kcl.ac.uk/news/supporting-the-turkish-lira-asses...

So Erdogan's Turkey is an interesting basket case all around — one for future economics textbooks maybe.

[FreeHugs]

    The M2 money supply in Turkish liras is climbing,
    but not in the same proportion as the rate cuts and inflation

Not? It looks like the money supply doubled over the last 12 months.

Does it really need an expert on Turkey's economy to see a relation between the doubling of an asset and the asset being worth half as much afterwards?

[pavlov]

There are many other factors like the foreign exchange reserves of Turkey and its commercial banks, which have been depleting.

Consider a case where a Turkish bank held two billion euros in 2021. They exchange half of it for liras in 2022 and receive N billion liras. A year later and after 80% inflation, they exchange the other half for liras and receive 1.8*N billion liras. That's not the government printing money to fund its spending, yet the money supply is increasing just like you'd see on the graph.

Like I wrote in my previous reply, Turkey has a unique program where it guarantees local currency deposits against hard currency exchange rate losses. That's meant to attract deposits and will obviously increase the money supply when locals trade their dollars/euros for liras — but it's not exactly "money printing", rather a completely new layer of risk for the central bank (and the losses may have to be offset by printing money eventually, but importantly that wouldn't show up yet in the graph we're looking at).

[FreeHugs]

What does it mean when you say the turkish bank exchanged their Euros for Liras? Where did the Euros go, where did the Liras come from?

[pavlov]

The Turkish central bank provides hard currency liquidity. It's absolutely vital for the economy, as import and export businesses in Turkey can't use the lira for most of their operations because foreign companies don't want that kind of emerging market currency risk.

The Turkish lira is free floating, so the central bank buys and sells liras at market rates. And seems like they're getting desperate to make sure foreign currency stays in the central bank:

https://www.bloomberg.com/news/articles/2023-02-24/turkey-ce...

"The request comes after commercial banks wired a net $2.3 billion to deposit accounts abroad in the first six weeks of the year, one of the people said, asking not to be named because the information is confidential. Hard-currency outflows are hampering efforts to keep the lira stable and inflation in check in the run-up to elections slated for May.

"While there are no regulations preventing banks from wiring capital to their correspondent banks abroad, Turkish officials have said that they want free cash kept in the monetary authority’s coffers."

So, a Turkish business sells a boatload of plums to Germany and gets paid in euros. The euros are wired from Germany to a Turkish bank. The bank's accounts are held in liras, so the business can't keep the euros directly. Instead the bank deposits the euros with the central bank and gets liras at market rate. The central bank now has more hard currency that Turkey's government might eventually use to pay for things like buying fighter jets (or whatever in the budget that's not domestically produced).

The plum business owner isn't very happy about holding liras in his bank account though, because he knows they might be worth 50% less in a year. So he immediately spends the money on things his business needs, paying a bit more than he did last time, just to ensure he can get the products... And that's how local inflation is being fed even by a seemingly positive thing like exporting plums. Government spending wasn't a factor here. But low local interest rate is a factor because lowering the costs of loans enables the plum business owner to spend more liras.