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Testing Minsky’s Financial Fragility Hypothesis for Turkey’s Public Finances

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  • Can, Cansin Kemal
  • Canöz, Ismail

Abstract

This paper gauges the degree of fiscal vulnerability in Turkey from a Minskian perspective. Succinctly speaking, Minsky’s financial stability hypothesis states that the government should apply hedge financing at least sporadically and pursue countercyclical fiscal policies to restore stability. We calculated two fiscal fragility indices based on Minsky’s hypothesis to examine the recent trends in Turkish public finances. According to our findings, Turkish fiscal balances are in a deteriorating trend and heading towards (ultra)Ponzi financing which is evidenced by the plummeting values of the fiscal fragility index. The results are suggestive that currently the fiscal performance in Turkey is waning gradually and current fiscal posture is not on a par with past years. Worsening fiscal balances emit a signal for a looming fiscal crisis and it is evident that this trend should promptly be reversed by the aid of appropriate expedients. Quitting the use of procyclical fiscal policies, building up public confidence by primary balance generation, implementing full-fledged tax reform, restructuring contingent liabilities, proper scrutiny of expenditures, reducing profligacy are among the policy options available for the government. Notwithstanding the abundance of alternative fiscal policies, the current Covid-19 pandemic is quite a hindrance to attaining intended outcomes regarding fiscal stability.

Suggested Citation

  • Can, Cansin Kemal & Canöz, Ismail, 2020. "Testing Minsky’s Financial Fragility Hypothesis for Turkey’s Public Finances," Public Finance Quarterly, Corvinus University of Budapest, vol. 65(4), pages 497-514.
    • Handle: RePEc:pfq:journl:v:65:y:2020:i:4:p:497-514
    DOI: https://doi.org/10.35551/PFQ_2020_4_4
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    References listed on IDEAS

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    1. Beshenov, Sergey & Rozmainsky, Ivan, 2015. "Hyman Minsky's financial instability hypothesis and the Greek debt crisis," Russian Journal of Economics, Elsevier, vol. 1(4), pages 419-438.
    2. Stoian, Andreea & Obreja Brasoveanu, Laura & Dumitrescu, Bogdan & Brasoveanu, Iulian, 2015. "A new framework for detecting the short term fiscal vulnerability for the European Union countries," MPRA Paper 63537, University Library of Munich, Germany.
    3. Miss Gabriela Dobrescu & Iva Petrova & Nazim Belhocine & Mr. Emanuele Baldacci, 2011. "Assessing Fiscal Stress," IMF Working Papers 2011/100, International Monetary Fund.
    4. Georgios Argitis & Maria Nikolaidi, 2014. "The financial fragility and the crisis of the Greek government sector," International Review of Applied Economics, Taylor & Francis Journals, vol. 28(3), pages 274-292, May.
    5. Mr. James McHugh & Iva Petrova & Mr. Emanuele Baldacci, 2011. "Measuring Fiscal Vulnerability and Fiscal Stress: A Proposed Set of Indicators," IMF Working Papers 2011/094, International Monetary Fund.
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    More about this item

    Keywords

    fiscal fragility; countercyclical policy; Minsky’s financial fragility hypothesis; Ponzi; hedge financing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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