I had the opportunity to join Professor Hanke to discuss the crisis in Turkey. The professor sketched out his view expressed in a recent op-ed piece in the Wall Street Journal, arguing that Turkey is best served by adopting a currency board, anchoring the lira to hard currency, like the euro or dollar, or gold.
I do not see Turkey’s problem being essentially a currency crisis, but a broader crisis of confidence. It stems not just poor macroeconomic conditions, but also, and more importantly, the lack of a credible policy response. The independence of the central bank has been compromised. While the dislike for the painful medicine that orthodox policies would entail is understandable, Turkey has failed to announce any strong policy response.
A currency board is a way to outsource monetary policy. That too would seem loathsome to the nationalistic government. Moreover, it would require more credible policy. Without policy change, the Turkish lira’s bounce today may prove to be short-lived.