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Abstract:
Almost 12 months after the
launching of the three-year stabilization program backed by the
International Monetary
Fund, Turkey experienced an acute liquidity crisis that
threatened the viability of the disinflation
and the fiscal adjustment program. The paper is an attempt at
providing answers to the question
‘could the liquidity crisis have been avoided?’, without
resorting to the lack of unfavorable external
conditions during 2000, such as the rise in the oil prices and
the U.S. federal funds rate as well as the
unfavorable change in the US$/Euro parity. Three factors that
are argued to have contributed to the creation
of the 2000 liquidity crisis are: 1- Inability of the Turkish
government in maintaining the stream of
good news and sustaining capital inflows; 2- Lack of enough
backing of the program by the IMF in terms
of providing sufficient insurance against exchange rate risk. 3-
Existence of the “no sterilization” rule
in the letter of intent, which was argued to be a 'design flaw'
in the program since it led to interest rate undershooting
initially. These factors coupled with the fragile structure of
the banking system helped bring
about the events that led to the following crisis at the end of
February 2001.
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