Abstract for: Modeling and Analysis of the Speculative Dynamics of Currency Exchange Rates: 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 and be affected by the economy 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. The 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 speculative and external disturbances, in the base model. Then, the effects 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. Simulation results reveal that coping with an economic crisis does not only depend on monetary policies but also on the perception and behavior of people. Policies that focus on preventing speculation/panic among individuals are therefore particularly important to avoid unstable fluctuations in exchange rates in developing markets.