Selçuk, F.Ardic, O. P.2018-04-122018-04-1220099781606921845http://hdl.handle.net/11693/38005The conduct of policy under floating exchange rates is becoming an increasingly important concern for developing countries. The challenge facing the central banks is to contain the volatility of the exchange rate while achieving lowinflation and stimulating output growth. As a complement, the governments must implement sound policies to bring the fiscal and legal environments close to those of the advanced economies so as to enhance long-term economic growth. One recent example of an emerging economy that confronts this challenge is Turkey with a history of high inflation and a collapse of a fixed exchange rate based stabilization program that resulted in a marketforced devaluation. After a review of the literature, this chapter analyzes the developments in the foreign exchange market in Turkey in light of the Central Bank's policies during the floating exchange rate system between February 2001 and November 2003. The results indicate that the Central Bank had been successful in containing volatility and reducing the average inflation rate. However, the accumulated risks in the economy, such as the extreme appreciation of the currency and high real interest rates make the system vulnerable to adverse shocks. © 2009 by Nova Science Publishers, Inc. All rights reserved.EnglishEmerging marketsExchange rate systemsFinancial volatilityBook Chapter