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Speculative Dynamics of Exchange Rates in Turkey: A System Dynamics Approach

Author

Listed:
  • Ceren Çehreli

    (Boğaziçi University 34342 Bebek, Istanbul, TURKEY,)

  • İpek Dursun

    (Boğaziçi University 34342 Bebek, Istanbul, TURKEY,)

  • Yaman Barlas

    (Boğaziçi University 34342 Bebek, Istanbul, TURKEY,)

Abstract

A country’s economy may undergo a period of volatility due to domestic politics and challenging external environments. Foreign exchange rate is one of the factors that may affect and be affected by the economy of a nation significantly. Motivated by the volatile US Dollar exchange rate issue in Turkey, the impacts of speculation and manipulation on the dynamics of foreign exchange rate in developing markets are examined in this paper. The study focuses on the structures generating the unstable US Dollar exchange rate against Turkish Lira by using system dynamics approach, based on relationships among inflation, interest rate, exchange rate and monetary market. System dynamics is a convenient approach for this problem because of the nonlinear, dynamic and complex structure of this problem. First, a stable-market model is formulated by excluding any speculative and external disturbances, in the base model. Then, the effects of speculation among people, the existence of manipulative investors and interest rate adjustment intervention by Central Bank are included by extending the base model in each scenario. Simulation results reveal that coping with an economic crisis does not only depend on monetary policies but also on the perception and behavior of people. Policies that focus on preventing speculation/panic among individuals are therefore particularly important to avoid unstable fluctuations in exchange rates in developing markets.

Suggested Citation

  • Ceren Çehreli & İpek Dursun & Yaman Barlas, 2017. "Speculative Dynamics of Exchange Rates in Turkey: A System Dynamics Approach," Yildiz Social Science Review, Yildiz Technical University, vol. 3(2), pages 103-120.
    • Handle: RePEc:aye:journl:v:3:y:2017:i:2:p:103-120
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    References listed on IDEAS

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    1. Thomas Klitgaard & Laura Weir, 2004. "Exchange rate changes and net positions of speculators in the futures market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 17-28.
    2. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
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    JEL classification:

    • F00 - International Economics - - General - - - General
    • F30 - International Economics - - International Finance - - - General
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M00 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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