Anatomy of a currency crisis: Turkey 2000‐2001

Purpose - To examine in depth one of the currency crises proliferating in emerging markets during the last decade. Design/methodology/approach - Three “generations” of currency crisis models are used to identify vulnerabilities facing the Turkish economy in the period 1999‐2000, leading up to the crisis. The IMF‐backed stabilization program, which attempted to use an active crawling peg as an inflation anchor, is reviewed critically. The specific events triggering the onset of the two crises in 2000 and 2001 are analyzed. Findings - The crisis is seen to be a consequence of capital inflows, real currency appreciation, increasing external vulnerability, and the rapid exit of capital. Research limitations/implications - It is concluded that it is a mistake for emerging economies to liberalize the financial system before implementing adequate supervisory measures, and to adopt a crawling peg which is not supported by fiscal reform. Originality/value - The paper adds to the extensive examination of currency crises, and integrates macroeconomic and microeconomic approaches. The Turkish crisis can be viewed as a learning experience that policy makers in other developing nations could avoid by following the guidelines and conclusions given.