ORIGINAL SIN, DOLLARIZATION AND FEAR OF FLOATING

Abstract

In this study, we examine fear of floating behaviors of central banks in countries which have encountered with original sin and dollarization problems at high level, and detect the relationship among original sin, dollarization and fear of floating for Turkish Economy at period of 1999–2007. Emerging market economies (EME) where floating exchange rate regimes are officially applied, original sin and dollarization cause to central banks actually intervene to exchange rate market. On the other hand, EME’s central banks which can not ignore foreign exchange denominated liability of economic agents, want to lessen dimension of huge fluctuations in exchange rate market by using foreign exchange reserves and interest rates and so these central banks act with fear of floating. By these reasons, although EMEs have applied floating exchange rate regimes, central banks can not perform monetary policy operations independent from capital flows. When these symptoms are being considered at the scope of Turkish Economy, we determine that UIG1 and dollarization indexes materialized at highest level during 1999-2007, UIG3 index and YIG indexes decreased respectively beginning from 2002 and 2004. Consequently, Turkish Economy has reflected considerable exposures to thepotential damages of huge fluctuations in exchange rate market which occur in balance sheet of residents at the end of sudden stop and/or reversal of capital flows. Therefore, although floating exchange rate regime has been applied since February 2001 crises, CBRT has intervened the exchange rate market actually. Movements of international rezerves/M2Y, RVER, RVEI indexes have proved that CBRT act with fear of floating. Nevertheless, to accumulate the foreign exchange reserves by CBRT in order to prevent the big fluctuations in exchange rate market imply floating with life jacket during 2002-2007 in Turkish Economy.