Turkish Currency Crisis of 2000-1, Revisited

Nazim Ekinci and Korkut A. Erturk

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: Turkey's exchange rate based stabilization program had collapsed within just eleven months of its implementation. Unsustainable public debt dynamics and fragility of the banking system have been the main reasons blamed for the demise of the program. However, the banking sector fragility became an issue only after the economy was hit buy a liquidity crunch in November 2000. Because the central bank functioned as a currency board, an abrupt reversal of the capital inflow was responsible for the liquidity crunch. The onset of the stabilization program brought down interest rates as expected and thus created ample opportunities for speculative investors to make safe one-sided bets. Thus, in our view the real cause of the capital reversal was profit taking on the part of foreign speculative investors holding government securities who conjectured that falling interest rates had reached their limit at the time.

Pages: 20 pages
Date: 2004
New Economics Papers: this item is included in nep-cwa and nep-ifn
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