However, competition indexes show that the devaluation of the Turkish lira do not increase Turkey’s competitiveness in any way. The unfavorable impact of high inflation has also been the felt in the labor market and prevented it from functioning effectively. Economic growth within continuous expansion and contraction cycles made the labor force volatile. Those, who want to work in this volatile environment, especially unskilled workers, are the first ones to lose their jobs in periods of contraction and the last ones that are employed in expansion periods. This means that the period of high and chronic inflation experienced by Turkey is one of the underlying reasons for social problems triggered by the fact that sustainable employment growth has yet to be achieved. Meanwhile, alongside the tendency of currency substitution with high and volatile risk premium created by high inflation, real interests, which were high due to the problematic public debts, caused a debt spiral and the vulnerability of the economy to exogenous shocks increased. This situation both clouded expectations and hindered the effective utilization of monetary policy Inflation diminished the effectiveness of financial markets to intermediate. This is due to the fact that, in a highly inflationary environment, players in the market are unable to foresee the future as they lack the appropriate knowledge. This situation, combined with the problem of public deficit, led to a significant decline in the credits that the banking sector provides to the non-financial sector.
Looking at the past, we see lax fiscal policies and monetary policies, which had to accommodate them. The latter was accompanied by pegged or foreseeable exchange rate regimes. The outcome of this scenario was high inflation and periods of volatile and unbalanced growth. In such an environment, expectations deteriorated because the public sector led the excessive increase in domestic demand, maturities were shortened and uncertainty increased, the current account deficit widened, and measures continued to fell behind. With the addition of the adverse trigger-effect of domestic or external factors to this environment, an increase in foreign exchange demand and pressure on the foreign exchange reserves of CBRT was inevitable, resulting in crises and devaluation. However, the present circumstances of the Turkish economy are very different from those of the past. To start with, as you all know, unlike the past, a floating exchange rate regime is being implemented. The most apparent feature of the floating exchange rate regime is that it is shock-absorbent. In other words, changes in the demand or supply of foreign exchange are reflected in the level of the exchange rate, and in contrast to pegged or foreseeable exchange rate regimes, the exchange rate goes up or down.