A new approach to the third generation currency crisis models :|an application for Turkey

Abstract

Since the 1980s, three currency crisis models have emerged to explain the formation of currency crises and define the appropriate policies. The purpose of this study is to summarize the first and second generation crisis models and then expand the third generation crisis models by proposing an original model incorporating export, imported intermediate goods, and risk premium variables to the model of Philippe Aghion, Philippe Bacchetta and Abhijit Banerjee (2001), which is one of the most critical studies in the literature. In this context, the model allows for the effects of changes in exchange rates on exports, importation of intermediate goods, short-term external debt, and the risk premium. The obtained results imply that a decrease in interest rate would be optimal in the case of high level and/or elasticity of exports. However, an economy with a high level of intermediate goods importation and/or foreign debt should implement a higher interest rate policy. An empirical analysis conducted by using the related data of the Turkish economy to test the effectiveness of the model and the recommended policies. The regression results show that the created model is not very suitable for the data of Turkey between 1994-2019.