The theory of optimum currency areas and the analysis of Turkey?s accession to EU monetary system

It is remarkable that the emerging financial markets experiencing the economical crises. Mexico (1994), Asia (1997), Russia (1998),Brazil (1999) and Turkey (2000 ? 2001) crises are the samples of those crisis. Before the experiencing the occurrence of the crisis, implementation of the intermediate currency systems that is in crawling peg form in Mexico, Indonesia, Russia, Brazil and Turkey, and in crawling band form in Malaysia and Thailand, therefore, the intermediate currency systems have been questioned.It is claimed that the emerging markets need to prefer either fixed Exchange rate system or flexible Exchange rate during the new era when the globalization rises according to the ?bipolar? approach as it was stated strongly by Fischer (2001) on the grounds of Impossible Trinity Hypothesis figured out by Frankel (1999).On that point, we consider the bipolar approach for Turkey that started to implement the flexible exchange rate in 2002 within the context of ?Transition to Strong Economics?:Under such condition where the capital movements are in; the flexible exchange rate that Turkey implements take place at a corner of the triangle of the impossible trinity and the Euro Area as the monetary area of the EU where Turkey tries to be part of should be at another corner.At the point, accession to Euro area, on the base of bipolar hypothesis, is the other choice for Turkey against the flexible exchange rate policy that is followed by Turkey. The Euro area is (currency union) a monetary union and it is a fixed exchange rate system. The ?Optimum Currency Areas? was figured out in the study of Mundell (1961) to generate the theoretical frame for currency unions. Within the context, the thesis tries to question whether the EU Area is the optimal currency area for Turkey or not. The thesis also indirectly implies whether Turkey can completely implement the flexible Exchange rate within the frame of ?Fear of Floating Hypothesis? of Calvo and Reinhart (2002).The Exchange Rate Votality Index (RVER) and Interest Rate Votality Index (RVEI) in Hausmann and others? (2001) study is used to determine whether Turkey has fear of floating during the implementation of flexible Exchange rate system fort he implicit aim of the study.The VAR model and OCA (optimum currency areas) index is used to determine whether the EU Area is optimum currency area for Turkey or not, in the thesis. The existence or nonexistence of the symmetry of the demand and supply shocks either among EU countries or between EU countries and Turkey are analysed within the frame of the literature of the optimum currency area theory and VAR model. The supply and demand shocks which are necessary fort he analysis in the study, are gathered by Blanchard and Quah method separately for each country. The Panel data analysis is used to calculate the OCA index.According to the finding of those three analyses, Turkey has a fear of floating although he implements the flexible exchange rate, so he cannot implement the flexible exchange rate system completely. On the other hand, VAR model and OCA index approves that Euro Area is not the optimum currency rate for Turkey as the theses claims. Additionally, according to the VAR model findings, Euro area is not an optimum currency area at all. Therefore, unlike the bipolar approach, it is not an optimum solution for Turkey to choose either complete flexible rate or complete fixed rate systems.The study reaches a result that there is not a Exchange rate system that is valid at any time or under any condition for Turkey. Thus, the thesis does not suggest and Exchange rate system for Turkey.The thesis concludes that Euro area could not generate an optimum currency area for itself and Euro area is not a optimum currency area for Turkey. Additionally, Turkey has experiencing serious practical problems during the implementation of the flexible Exchange rate system that is still in operation.