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The 1994 currency crisis in Turkey

  • Celasun, Oya
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    As a result of Turkey's currency crisis in 1994, output fell 6 percent, inflation rose to three-digit levels, the Central Bank lost half of its reserves, and the exchange rate (against the US dollar) depreciated by more than half in the first three months of the year. The author presents stylized facts associated with the government's debt-financing mechanisms and other relevant macroeconomic variables to show the system's inherent fragility at the time of the crisis and to clarify the extent to which different factors contributed to the crisis. The author argues that huge requirements for public sector borrowing in 1993 and early 1994, combined with major policy errors in financing the deficit, led to the currency crash. As a result of interventions to control interest rates and treasury borrowing at the same time, the market for domestic borrowing almost disappeared, the government turned to monetization for financing, and the value of the overappreciated Turkish lira plummeted.

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    File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1998/04/01/000009265_3980624143318/Rendered/PDF/multi_page.pdf
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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1913.

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    Date of creation: 30 Apr 1998
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    Handle: RePEc:wbk:wbrwps:1913
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    1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
    2. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    4. Agenor, Pierre-Richard & McDermott, C. John & Ucer, Murat, 1997. "Fiscal imbalances, capital inflows, and the real exchange rate: The case of Turkey," European Economic Review, Elsevier, vol. 41(3-5), pages 819-825, April.
    5. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
    6. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers 545, Board of Governors of the Federal Reserve System (U.S.).
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