Huge requirements for public sector borrowing in 1993 and early 1994, combined with major policy errors in financing the deficit, led to Turkey's currency crash in 1994.
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 U.S. dollar) depreciated by more than half in the first three months of the year.
Celasun 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.
Celasun 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.
This paper—a product of the Development Research Group—is part of a larger effort in the group to study currency crises. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Kari Labrie, room MC3-347, telephone 202-473-1001, fax 202-522-3518, Internet address klabrie@worldbank.org. (44 pages)
The full report is available in PDF format.