ABSTRACT

Despite numerous theoretical and empirical studies that associate competitive exchange rate policies with high economic growth, many developing countries deliberately pursue policies aimed at keeping their local currency overvalued. Traditional economics literature explains this paradox in relation to dependency on imported inputs and debt dollarization. Recent studies that tackle this question emphasize the importance of distribution relations, political regimes, electoral cycles, and institutions. This article aims to analyze the political economy of exchange rate policies in Turkey between 20022019 in the light of these two strands of literature. The paper shows that during this period, the Central Bank followed policies aimed at keeping the Turkish Lira TL overvalued. The decline in the real value of TL since 2015 does not indicate a shift to competitive exchange rate policies. The exchange rate preferences of various economic classes and interest groups indicate that competitive exchange rate policies lack societal legitimacy in Turkey.