Speculative Dynamics of Exchange Rates in Turkey: A System Dynamics Approach

Ceren Çehreli, İpek Dursun and Yaman Barlas
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Ceren Çehreli: Boğaziçi University 34342 Bebek, Istanbul, TURKEY,
İpek Dursun: Boğaziçi University 34342 Bebek, Istanbul, TURKEY,
Yaman Barlas: Boğaziçi University 34342 Bebek, Istanbul, TURKEY,

Yildiz Social Science Review, 2017, vol. 3, issue 2, 103-120

Abstract: A country’s economy may undergo a period of volatility due to domestic politics and challenging external environments. Foreign exchange rate is one of the factors that may affect and be affected by the economy of a nation significantly. Motivated by the volatile US Dollar exchange rate issue in Turkey, the impacts of speculation and manipulation on the dynamics of foreign exchange rate in developing markets are examined in this paper. The study focuses on the structures generating the unstable US Dollar exchange rate against Turkish Lira by using system dynamics approach, based on relationships among inflation, interest rate, exchange rate and monetary market. System dynamics is a convenient approach for this problem because of the nonlinear, dynamic and complex structure of this problem. First, a stable-market model is formulated by excluding any speculative and external disturbances, in the base model. Then, the effects of speculation among people, the existence of manipulative investors and interest rate adjustment intervention by Central Bank are included by extending the base model in each scenario. Simulation results reveal that coping with an economic crisis does not only depend on monetary policies but also on the perception and behavior of people. Policies that focus on preventing speculation/panic among individuals are therefore particularly important to avoid unstable fluctuations in exchange rates in developing markets.

Keywords: : Currency Exchange Rate; Speculative Market Dynamics; Emerging MarketsJournal: Yildiz Social Science Review (search for similar items in EconPapers)
JEL-codes: F00 F30 G00 G10 K00 K20 M00 M20 O10 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:aye:journl:v:3:y:2017:i:2:p:103-120

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