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The Policy Challenge with Floating Exchange Rates: Turkey’s Recent Experience

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  • Faruk Selçuk

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Abstract

This paper evaluates the developments in the Turkish economy in light of the Central Bank of Turkey’s (CBT) policies during a recent period of floating exchange rate system (March 2001–July 2003). It is found that the CBT was effective in containing volatility and reducing the average inflation rate while there was a strong recovery of output. However, there are accumulated risks in the economy. Particularly, the extreme appreciation of the Turkish lira during this period and the record level of real interest rates give the impression that the current state of the economy is fragile. Unless the government accelerates the structural reform process and pursues sound fiscal policies to reduce the public sector borrowing requirement and the debt ratio, an adverse shock to the system may trigger a reversal of fortune. Copyright Springer Science + Business Media, Inc. 2005

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 16 (2005)
Issue (Month): 3 (July)
Pages: 295-312

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Handle: RePEc:kap:openec:v:16:y:2005:i:3:p:295-312

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Web page: http://www.springerlink.com/link.asp?id=100323

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Keywords: exchange rate volatility; float; intervention; developing economies;

References

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  1. Irfan Civcir, 2003. "Money demand, financial liberalization and currency substitution in Turkey," Journal of Economic Studies, Emerald Group Publishing, vol. 30(5), pages 514-534, October.
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  14. Ilker Domac & Mohsen Bahmani-Oskooee, 2002. "On the Link between Dollarization and Inflation : Evidence from Turkey," Discussion Papers 0207, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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