It has been embraced in emerging-market finance ministries, threatening trouble
This chaos reflects the upside-down monetary policy pursued by Mr Erdogan. He insists that lowering interest rates is the key to fighting inflation, rather than tightening the screws, which is the solution favoured by generations of orthodox economists. To explain how this could be the case, Turkish officials invoke names ranging from Irving Fisher to God .
Some reasons for supporting ultra-loose policy when inflation is out of control are much older than Turkey’s experiment. Inflation eats away at the value of official debts, which weigh down developing countries. Letting prices run wild is an appealing option when a government has borrowed too much, even if it is also the surest path to hyperinflation and a currency crash.
It is nevertheless true that monetary policy works differently in emerging economies. Foreign investment matters more for market rates; aggregate demand matters less. In a recent paper Gita Gopinath, the’s chief economist, and co-authors find that emerging markets’ policy rates have next to no impact on their real economies.
Nor are international markets the only force with which policy must contend. Poor countries are also home to big informal sectors, where firms do not borrow from banks. Thegdp
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