How Fiscal (Mis)-Management May Impede Trade Reform: Lessons from an Intertemporal, Multi-Sector General Equilibrium Model for Turkey

We utilize a multi-sector general equilibrium model based on intertemporally optimizing agents to study issues of trade liberalization and fiscal adjustments in the context of the Turkish economy. A key feature of the model is its explicit recognition of the distortionary consequences of excessive borrowing requirements of the public sector through increased domestic interest costs. The modelresults suggest that the postponement of adjustment to growing public debt and fiscal imbalances could be detrimental; and that in the absence of coordinated fiscal reform, the welfare gains expected from trade liberalization may significantly be negated.