Anatomy of a balance-of-payments crisis: Application of a computable general equilibrium model to Turkey, 1978–1980

Abstract

This paper analyses quantitatively the causes of the foreign exchange crisis in Turkey in the late 1970s through application of a multisector computable general equilibrium (CGE) model. The model incorporates some mechanisms that simulate the actual workings of the foreign exchange market during the turbulent foreign exchange disequilibrium period 1978–1980. It features the simultaneous operation of both quantitative controls and premium rationing schemes. Factors contributing to the foreign exchange crisis are analysed through counterfactual simulations which examine the implications for the Turkish economy of use of a flexible exchange rate, no oil price shock in the 1978–1980 period, and maintaining a constant price-level deflated affective exchange rate. Our results indicate that while exchange rate policy played an important role in bringing about the foreign exchange crisis, the influence of other factors was substancial.