 A Simple Model Of Currency Crises And Budget Deficits: The Case Of TurkeyTevfik Hakan Ongan and Gokhan Karabulut MPRA Paper from University Library of Munich, Germany Abstract: The aim of this paper is to explore the determinants of currency crises and to illustrate the dynamic behaviour of the fundamental macroeconomic variables in a small open economy under a peg regime. The mainstream models in currency crises literature are not sufficiently available to explain the recent Turkish currency crisis observed in 2000. Turkey was successful to fix domestic credit at the same time with a crawling peg regime in order to achieve price stability. Furthermore, the political preferences were also in favour of continuing the program. Though these facts, the peg collapsed by a speculative attack. Depending on these issues, in our model, which uses a Keynesian framework augmented with a speculative foreign exchange market, it has been focused on the fundamental macroeconomic relationship between budget and trade deficits. Our theoretical model and the simulation results indicate that whether the deficit is financed by monetisation or domestic borrowing, persisting budget deficits cause the peg system to collapse. Overborrowing problems and deterioating balance sheets also play an important role on the unsustainability of the peg regime. Keywords: Currency Crises; Turkey; Budget Deficits; Balance of Payments; Peg Regime (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1470 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
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