2020 IB Extended Essays

Introduction:

In the last two decades, when external financial resources were cheap, Turkey became dependent on short- term foreign financial sources. They pursued borrowing based and construction industry-oriented growth strategies. (ALKİN, 2020) This resulted in further over-reliance on external foreign resources and a depreciating currency. The gradual increase from 17,75% to 24% was an attempt to make Turkey 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?" The purpose of this research question is to test the economic theory behind interest rates as a determinant of exchange rates for Turkey. The question addresses how effective choosing to raise interest rates was, for the aim of currency appreciation. This decision was also made based on the issues Turkey faced regarding political dilemmas. Towards the end of these decades, the central bank of the United States(US) began to use monetary policy to make USD more valuable in the global exchange market. This was also followed by the Trade war between the US and China resulting in protective policies, sanctions, and external interventions from the US against Turkey. (Harper, 2018) Being a developed country, Turkey was negatively impacted by these decisions. The government and the firms of Turkey had issues regarding paying and renewing debts. (ALKİN, 2020) All of these dilemmas resulted in the Turkish Lira(TRY) losing its value in the global market. Ultimately, unemployment increased, domestic demand and supply decreased, and economic growth was slowed down. Based on these issues, after June 2018, the Turkish central bank began to increase the weekly interest rate which have been low for decades. (Financial Turbine, 2018)Initially it was increased from (8% to 16,50%). This was followed by another increase on June 8th from (16,50% to 17,75%). Finally, on September 14th, the interest rate was increased from (17,75% to 24%). These interest rates remained stable until July 2019 where they were decreased again.

4