Turkey’s exchange rate policy system Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Overview
Turkey follows floating exchange rate policy system. Floating exchange rate is country’s exchange rate regime which is set by evaluating the supply and demand for that specific currency in relation to other currencies, by foreign exchange markets. The Central Bank of the Republic of Turkey’s (CBRT) is responsible for the implementation of exchange rate policy.

Advantages of floating exchange rate

Under a free floating currency with floating exchange rate, the country has monetary independence. The country’s central bank can address the problems like temporarily high unemployment and low real growth by increasing money growth, lowering interest rate and increasing asset prices to mitigate the downturn.

A floating exchange rate can depreciate to compensate for a balance of payments deficit. This will help restore the competitiveness of exports. Downward pressure on the currency leads to depreciation with a subsequent fall in imports and rise in exports without having to induce a domestic recession.

Disadvantages of floating exchange rate

Speculation is an inherent part of a floating system and it can be damaging and destabilizing for the economy, as the speculative flows may often differ from the underlying pattern of trade flows. This will also cause instability and uncertainty for firms and consumers. The value of the currency devalues regularly thus this makes it difficult for the companies to plan for the future.
It can be inflationary. When the prices of imports increase then as a result of the depreciation of currency, inflationary pressure will rise. Inflation is created if exchange rate falls and the prices of import increase...........................

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