A critical evaluation of exchange rate policy in Turkey

This paper reviews and critically evaluates the exchange rate policy followed in Turkey in the post-1980 period during which a far-reaching program of liberalization has been launched. We conclude that the new exchange rate policy has been essential for Turkey's regaining its creditworthiness. Furthermore, it has positively contributed to growth of output and exports, and to expansion of tradables production relative to nontradables. Persistence of inflation and weakness of private investment in tradables overshadow the successes recorded in other areas, and cast doubt over the sustainability of Turkey's outward orientation. We argue that the root cause of these problems has been inconsistencies between overall economic policies, rather than the exchange rate policy itself. We compare the period of real appreciations since late 1998 with the earlier period of real depreciations, and draw policy implications.