Determination of ‘De Facto’ Exchange Rate Regime of Turkey

Studies in which researchers criticize the incompatibility of ‘de facto-de jure’, and exchange rate regimes of countries are classified started in 1979, and they still bear high importance. Incompatibilities between the results of prominent studies have pushed researchers into working on new models that determine exchange rate flexibility. One of these models were proposed in 2008 by Frankel and Wei. Using the model presented by Frankel and Wei (2008) in this study, whether there is any difference between the exchange rate regime (de jure) officially announced by the Central Bank of the Republic of Turkey (CBRT) and the applied exchange rate regime (de facto), in other words, whether there is a trend towards a different exchange rate regime due to the fear of fluctuation has been studied. According to Calvo and Reinhart (2002) who explained the reason for the interference of countries in exchange rates as a fear of floating, countries that declared an independent exchange rate actually refrain from the fluctuations in the rates and, de facto, tend towards fixed exchange rates or interim regimes. In particular, monetary authorities of countries that think that they will encounter problems such as low credibility, sudden stop problem, original sin problem, high dollarization, effect of transition from exchange rates to prices, reliability problem and limited integration with financial markets have de facto intervened in foreign exchange market by no remaining insensitive to great fluctuations in exchange rates due to the fear of floating. The research period in the study covers the years between 2003-2017, and according to the findings, it has been revealed that four different de facto exchange rate regimes were applied in Turkey during this research period. The model was applied for the specified sub-periods and the flexibility of the exchange rate regime of the country have been tried to be determined depending on the coefficient of the EMP variable representing the pressure in the foreign exchange market. While the meaningfulness of the EMP variable in each period is the precise indication of the fact that the fixed exchange rate regime is not de facto applied, the low EMP coefficients indicate that there is a de facto interim regime application. These results show that the de facto interim regime was applied in the period 2003-2017, however, it rejects the hypothesis of bipolar view proposed by Fischer (2001) while supporting the concept of fear of floating introduced by Calvo and Reinhart (2002). Moreover, it is clear in the results of the analysis that Turkey has implemented a stricter exchange rate regime after 2014 along with the new term policies of the Fed, US Central Bank, when the EMP results are taken into consideration.