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The 1994 currency crisis in Turkey

Author

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  • Celasun, Oya

Abstract

As a result of Turkey's currency crisis in 1994, output fell 6 percent, inflation rose to three-digit levels, the Central Bank lost half of its reserves, and the exchange rate (against the US dollar) depreciated by more than half in the first three months of the year. The author presents stylized facts associated with the government's debt-financing mechanisms and other relevant macroeconomic variables to show the system's inherent fragility at the time of the crisis and to clarify the extent to which different factors contributed to the crisis. The author argues that huge requirements for public sector borrowing in 1993 and early 1994, combined with major policy errors in financing the deficit, led to the currency crash. As a result of interventions to control interest rates and treasury borrowing at the same time, the market for domestic borrowing almost disappeared, the government turned to monetization for financing, and the value of the overappreciated Turkish lira plummeted.

Suggested Citation

  • Celasun, Oya, 1998. "The 1994 currency crisis in Turkey," Policy Research Working Paper Series 1913, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1913
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Agenor, Pierre-Richard & McDermott, C. John & Ucer, Murat, 1997. "Fiscal imbalances, capital inflows, and the real exchange rate: The case of Turkey," European Economic Review, Elsevier, vol. 41(3-5), pages 819-825, April.
    3. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    4. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    5. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
    6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    7. Paul Krugman, 1996. "Are Currency Crises Self-Fulfilling?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 345-407, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Mete FERIDUN, 2008. "Currency Crises In Emerging Markets: The Case Of Post‐Liberalization Turkey," The Developing Economies, Institute of Developing Economies, vol. 46(4), pages 386-427, December.
    2. Tamgac, Unay, 2011. "Crisis and self-fulfilling expectations: The Turkish experience in 1994 and 2000-2001," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 44-58, January.
    3. Dedeoğlu, Dinçer & Kaya, Hüseyin, 2014. "Pass-through of oil prices to domestic prices: Evidence from an oil-hungry but oil-poor emerging market," Economic Modelling, Elsevier, vol. 43(C), pages 67-74.
    4. Karabag, Solmaz Filiz, 2019. "Factors impacting firm failure and technological development: A study of three emerging-economy firms," Journal of Business Research, Elsevier, vol. 98(C), pages 462-474.
    5. Mariano Roberto S & Gultekin Bulent N & Ozmucur Suleyman & Shabbir Tayyeb & Alper C. Emre, 2004. "Prediction of Currency Crises: Case of Turkey," Review of Middle East Economics and Finance, De Gruyter, vol. 2(2), pages 1-21, August.
    6. K. Azim Ozdemir & Paul Turner, 2005. "The Demand for Base Money in Turkey : Implications for Inflation and Seigniorage," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 5(1), pages 1-8.

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