The 1994 currency crisis in Turkey
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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