On the structural weaknesses of the post-1999 Turkish disinflation program
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In December 1999, Turkey initiated an extensive disinflation program backed and supervised by the International Monetary Fund (IMF). In November 2000, however, Turkey experienced a severe financial crisis, which deepened and has continued to date. This contribution highlights the structural weaknesses of the exchange rate-backed disinflation program as manifested in its liquidity creation mechanism in a small and fragile financial system such as Turkey. This contribution also documents the fragility indicators of the Turkish banking system and demonstrates that the disinflation program led to an increased vulnerability of the banking system throughout 2000-1. Given the structural characteristics of the Turkish banking system, we argue that the orthodox policy of fully connecting the monetary expansion and liquidity requirements of the domestic economy exclusively to the speculative short-term capital flows was clearly a design flaw, overlooked by the IMF.