Abstract for: Understanding the Speculative Dynamics of Foreign Exchange Rate: A Case Study from Turkey

A country’s economy may undergo a period of volatility due to domestic politics and challenging external environments. Foreign exchange rate is one of the factors that may affect the economic standing of a nation significantly. Motivated by the volatile US Dollar exchange rate issue in Turkey, the impacts of speculation and manipulation on the dynamics of foreign exchange rate in developing markets are examined in this paper. This study focuses on the structures generating the unstable US dollar exchange rate against Turkish Lira by using system dynamics approach, based on relationships among inflation, interest rate, exchange rate and monetary market. First, a stable-market model is formulated by excluding any disturbances on the economy, which is considered the base run. Then, the effect of speculation among people, the existence of manipulative investors and interest rate adjustment intervention by Central Bank are included by extending the base model in each scenario. From simulation results, it can be inferred that coping with an economic crisis does not only depend on monetary policies but also on the perception of people. A policy, which focuses on preventing speculation/panic among individuals, is required to avoid unstable fluctuations in the exchange rate market in developing countries.