The Kapali Carsi

Answering questions on the exchange rate (USDTRY)

I just got a few questions from a reader through email, and being your friendly neighborhood economists, I am responding here for the benefit of many:

Can you tell me why it would be bad for the Turkish Lira to drop further than the 1.90-1.91 /USD? ..or is it better for the Turkish economy to to have a weaker Lira going into the first part of 2012?

A depreciation lira is bad for inflation, because of the FX pass-through, but theoretically beneficial for exports, and therefore the current account deficit. So there is a tradeoff. However, Central Bank of Turkey Governor Erdem Basci recently disclosed that the pass-through had increased to 20 from 15 percent. On the other hand, the Bank has also said recently that a weaker lira will not benefit the current account deficit any more. Citi Turkey economists have reached the same conclusion. So it seems a weaker lira will be more costly than beneficial for the Turkish economy.

Does it benefit the USA, when the USD to be stronger against the TL?

Not for trade, at least, using the same argument as before. In any case, Turkey is not one of THE MAJOR destinations for U.S. exports; they would be much happier with a strong yuan than a strong lira.

Last question….so are you a Boston Red Sox fan??? I hope so!

Definitely! As a former Bostonian, it is the Celtics, Red Sox and Patriots all the way, in addition to my beloved Besiktas. I hate the Lakers & Yankees…

2 Responses to “Answering questions on the exchange rate (USDTRY)”

ijoxxDecember 29th, 2011 at 6:19 pm


Thank you for answering my questions, so that a "Non-Ivy Leauge" graduate could understand.

I have read many different views of different sources on the internet regarding the current economic environment that has taken Turkey. It seems as though not everyone agrees; what a surprise right? Most have the Turkish Lira as a bull and some have it losing more value.

This unorthodox navigation by the TCB seems to cause more waves in the market than it does to comfort it's paying passengers. I actually listened to a few of his speeches and answer sessions on the tube. Afterwards, I have concluded that he is either extremely intelligent, leaving me to stupid to comprehend or his intention is to keep everyone guessing. I do admit he is much smarter than me.

My question; is Mr. Basci following someone's theory of economics that he may have studied during his education? Maybe you know the theory from your studies at Yale or Harvard…or is this really unorthodox and he is the first to behave in such a vital position?

Some have the Lira going back to 1.70 range by the 4th quarter of 2012. How do see the Lira from first quarter to fourth quarter? Although, the bank states that the Lira should be closely watched with the Euro and not the USD. However, the reality is most of Turkey's larger purchases that effect each of the 70 plus million consumers are pegged against the USD. One big example is natural gas purchases. The falling Lira looks more like a double-edged sword. What's your take?

Finally can you educate us the "pass-through" ? How it is calculated and derived?

Thanks, Irfan

"Huge Red Sox Fan" from Boston

Emre Deliveli edeliveliDecember 30th, 2011 at 5:22 pm

Well, it is normal for economists to disagree:) But most analysts are not very bullish on the lira these days, especially against the dollar, which has emerged as the only safe haven currency. In fact, even Basci said a couple of days ago that TRY could not compete against USD for this reason, and that it should be judged by its performance against EUR, not USD.

As for Basci, wait for Monday's HDN column, which will be posted here as well. I am addressing your question a little bit in the column (and more in the addendum to the column), but basically: He is smart. He is a decent economist, although not near the likes of Paul Krugman (but then who is). But then why is he so outside the orthodox approach? I can think of three reasons: First, I believe the CBT is extremely adverse to standard rate hikes for political reasons (basically, RTE doesn't want it); that's why they are undertaking these "stealth measures". But perhaps more importantly, he and his team really wanted to prove themselves to the world with these supposedly ingenuous measures, which have obviously backfired.

As for the lira, it is a double-edge sword; that's exactly what the exchange rate pass-though is about. And speaking of that, here is a recent CBT paper:

As I was saying in the post above, the ERPT is now 20 percent, according to Erdem Basci…