Fear of Floating in Turkey

Abstract

Many emerging markets have adopted floating exchange rate regimes after currency crises. Turkey has experienced a floating regime since 2002 combined with inflation targeting. The aim of this paper is to investigate the “fear of floating” phenomenon, named by Calvo and Reinhart (2002), in the transition to a low and stable inflation environment in Turkey before and after inflation targeting. The results demonstrate that the levels of exchange rate pass-through decreased substantially, thus weakening the “fear of floating” phenomenon in Turkey after inflation targeting. Therefore, we argue whether any reactions of the central bank to foreign exchange rates imply the “fear of floating” or the “fear of inflation”