The economic analysis of exchange rate policies (case of Turkey)

Collapsing of the Gold Standard at the end of the First World War resulted in a wide variety of exchange rate regimes and strict exchange market restrictions. Bretton Woods Agreement, which is introduced after Second World War, brought fixed but adjustable exchange rate system if necessary.Because of the increasing strain, the practise of fixing the exchange rate was usually abandoned and the breakdown of the Bretton Woods system caused adoption of many different exchange rate systems. Especially in developed countries, there was a tendency towards more flexible exchange rates. Collapsing of the Bretton Woods system also increased arguments about determinants of the choice of exchange rate regime and possible effects of different country circumstances between developed and developing countries.The choice of optimum exchange rate regime, especially for developing countries, has become the centre of debate, especially in the light of gradual liberalization of capital movements all over the world. The steady increase in magnitude of capital flows set the stage for new models in exchange rate determination and in addition to those identified by the Optimum Currency Areas approach, new fundamentals such as Hollowing out hypothesis and Fear of Floating phenomenon were developed.In order to determine the optimum exchange rate regime for Turkey, the benefits and costs of different exchange rate systems and different approaches on the subject should be evaluated. In this study, simulation method was used to determine empirically optimum exchange rate regime for Turkey via Optimum Currency Areas and new financial variables.