Abstract:

Turkish economy is captured by high interest – low exchange rate vicious circle under different economic policies and stabilization programs. Under this vicious circle TL keeps its overvaluation trend until a new economic crisis. Turkey has experienced this trend both under pegged exchange rate and floating exchange rate regimes. This article studies the effects of the overvalued TL using a simulation model structured on purchasing power parity and interest rate parity theorems, benefiting from foreign trade regressions with “time” and “value of currency” independent variables. Future scenarios are also studied using the same simulation model. It is harmful for Turkish economy to insist on high interest – low exchange rate policies. In order to eliminate the risk of a probable crisis, Turkey should adopt an economic policy which establishes and preserves the parities among inflation, interest rates and exchange rates and which receives the support of the economic agents. Such a policy will also strengthen the performance of the Turkish economy.

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