Misaligned? Overvalued? The Untold Story of the Turkish Lira

Abstract

There is a consensus among scholars that overvalued exchange rates result in currency crises. This paper estimates the equilibrium real exchange rate for Turkey using the correct methodology and finds that the lira was indeed overvalued before the crises in 1994 and 2001. However, the actual real exchange rate is at present close to the equilibrium level, exposing the myth propagated by the Turkish exporters that lira's overvaluation is responsible for Turkey's uncompetitive exports. The paper also highlights the role for fiscal adjustment in macroeconomic stability.