Currency Crisis: Cause and Resolution

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A number of currency crises have affected certain countries, which have also resulted in contagion in the sense that the crises affected neighboring countries. In a critical essay, select a country (or countries) affected by a specific currency crisis. Analyze the source of the crisis and the specific resolution of the issue. Indicate whether the International Monetary Fund (IMF) or another sovereign state or country provided intervention. Has the country's economy recovered since the conclusion of the crisis? Support your findings with additional academic references.

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  • Your essay is required to be 8-10 pages in length, not including the title and reference pages.
  • Support your submission with course material concepts, principles and theories from the textbook and at least five scholarly, peer-reviewed journal articles.
  • Use University academic writing standards and APA style guidelines.
  • Review the grading rubric to see how you will be graded for this assignment.

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Running head: CURRENCY CRISIS IN TURKEY

Currency Crisis in Turkey
Name
Institution

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CURRENCY CRISIS IN TURKEY

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Currency Crisis in Turkey
Currency crisis occurs in instances when there is an acute devaluation of a currency. In
most cases, it is a sudden occurrence and often leads to a severe drop in the value of a currency.
A currency crisis is as a result of either fundamental condition in the economy or by self fulfilling prophecies. But there are no known procedures for determining whether a specific
currency crisis was needed in order to achieve some given desired expectations on fundamentals
or simply a self-fulfilling event triggered sunspot (Celasun, 1999). In both cases, fundamental
conditions are the center initiators of any currency crisis. In addition to this, fundamentals
influence the private agent’s beliefs. Turkey has been in the fixtures of news cycles for its
repeated currency crisis in the years 1994, 1999, 2000 and 2001.
In 1994, the economy of Turkey was greatly hit with an acute financial crisis. Within the
first three months of 1994, the Turkish lira was devalued seventy percent against the United
States dollar; the Turkish central bank had lost fifty percent of its funds; the interest rates
suddenly and rapidly increased; economic growth declined by six percent and the inflation rate
skyrocketed to a three digit value level (Ozatay, 2000). In April 1994, the International Monetary
Fund launched a program to stabilize the economy but it was unsuccessful in implementing
structural adjustment measures. The stabilization program established possible causes of the
1994 crisis and the roles of fundamentals VS self-fulfilling expectations. There was a uniform
devaluation of macroeconomic fundamental in 1993 including credit, exchange rates, the total
amount of goods and services produced, total income earned, the level of employment
productive resources and the general behavior of prices. According to (Ozkan & Sutherland,
1995) the Turkish 1994 financial crisis was inevitable and neither foreign exchange nor interest

CURRENCY CRISIS IN TURKEY

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rate moved in conformity with the fundamental models of balancing payments crises which
resulted to a weak fundamental central role.
The economy of Turkish was steady before the occurrence of the 1994 crisis. In half a
decade before 1994, there was devaluation in fiscal fundamentals with insignificant effects on
inflation rates. This was similar to the case of Israel in 1985 (Kardri Ekinci & Alp Ertuk, 2007).
According to the stabilization program established, this was due to apparent lack of correlation
between fiscal fundamentals and inflation and use of domestic debt to finance the budget deficit.
Domestic debt financing has the impact of blurring correlation between inflation and public
deficits and also a massive loss of funds by the central bank. Sustaining domestic debt financing
is not possible when real interest rates exceed real rates of economic growth with no offsetting
primary surpluses (Yedan, 2006). This implies that there are some fundamental conditions that
must be met for a domestic debt financing to trigger a currency crisis. First, monetization of all
debt stock by the debt supplier deprives the economy of its excess supply of base money thereby
depleting foreign funds of the central bank, this is called policy mistake. Policy mistake is when
there are no laid down corrective fiscal measures to maintain domestic debt finance. Second,
domestic debt suppliers shifting to foreign currency dominated assets.
The stabilization program suggested that the following were the major causes of Turkish
1994 currency crisis: growth of external imbalances and the wide economic conditions between
the year 1990 to late 199...


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