Macroeconomic Developments and Exchange-Rate Policy in Turkey, 1980-2001

Abstract

Turkey introduced an exchange-rate-based stabilization (ERBS) program in January 2000. The program seemed to be on track until the economy was hit by a sudden attack on the Turkish currency in November 2000. After a few months of muddling through, a second attack hit the currency in late February and Turkey declared that it was going to implement a floating exchange rate regime from that date onwards. This was not the first time experience with the ERBS however. In fact, since 1980 authorities have been using exchange rate in order to stabilize the economy even if such an announcement has been avoided most of the time. This article analyzes macroeconomic developments in Turkey in the period of 1980-2001 and provides a rationale for why policymakers need to support their exchange rate arrangement with other economic policies that the arrangement requires. Although, a properly valued exchange rate is critical for sound economic management and sustained growth, it’s the adoption of appropriate monetary and fiscal policies that ultimately will ensure macroeconomic stability. Since 1980, exchange rate has been used as the main stabilization instrument in Turkey. But it has never been supplemented with the necessary macroeconomic policies to ensure its success.