Turkey's next move

摘要

Chalk up another victim of the International Monetary Fund's currency policy. On Feb. 21, Turkey gave up on its IMF-imposed currency peg and allowed the lira to float. Instead, it sank-down about 30% against the dollar and the euro between Feb. 21 and Feb. 27. No one should have been surprised. Turkey's pegged-ex-change-rate regime was fatally flawed. These regimes require a central bank to manage simultaneously the exchange rate and domestic liquidity. This is an impossible task. When foreign reserves begin leaving a country, domestic liquidity is squeezed. The central bank attempts to offset this by pumping up domestic liquidity. Anticipating troubles, additional capital takes flight and the contradiction between exchange-rate policy and domestic-liquidity policy grows. That's when the speculators start betting that the peg will soon blow up. Turkey's currency collapse-like similar events in Mexico, Thailand, Korea, Indonesia, Russia and Brazil-was yet another textbook case of the inherent instability of currency pegs.