2020 IB Extended Essays

Abstract

The past 5 years Turkey has endured difficult times as the economy struggled to escape its reliance on foreign financial resources for economic activity. Being in high levels of debt and running a current account deficit truly harmed the Turkish Lira. Turkey implemented contractionary demand side policies to possibly appreciate the lira and become more competitive in the global market. Therefore, this assignment covers, "To what extent, has the increase in Turkish interest rates from 17.75% to 24% in 2018, impacted the Turkish Lira in US dollar terms?" This question also explores the effectiveness of a monetary policy decision to alter exchange rates. Secondary research was conducted to obtain background knowledge on the topic of exchange rates and interest rates, whilst primary research was conducted in order to acquire a more specific knowledge on the topic, which is particularized to the chosen country (Turkey). Economists in Turkey were interviewed, and they provided essential information on both how interest rates directly impact exchange rates and how Turkey’s specific condition impacted the outcome. However, if the essay only covered Turkey’s outcome, the statement “ To what extent” would not be addressed, hence the monetary policy was compared to a similar decision made by the UK’s central bank as they increased interest rates from “0.5% to 0.75%”. Research conducted for the UK matched the ones for Turkey to directly address the extent of currency appreciation. It was concluded that Turkey achieved a greater extent of currency appreciation compared to the UK as they were able to impact the determinants of exchange rates more effectively such as, GDP, inflation, current account, trade balance and the reverse multiplier. However it must also be considered that Turkey’s increase in interest rates was much larger, hence a greater extent of currency appreciation was theoretically expected.

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