How Voters Respond to Currency Crises: Evidence From Turkey

A burgeoning literature shows that international trade and migration shocks influence individuals’ political attitudes, but relatively little is known about how international financial shocks impact public opinion. This study examines how one prevalent type of international financial shock—currency crises—shapes mass political attitudes. I argue that currency crises reduce average citizens’ support for incumbent governments. I also expect voters’ concerns about their own pocketbooks to influence their response to currency crises. Original survey data from Turkey support these arguments. Exploiting exogenous variation in the currency’s value during the survey window, I show that currency depreciations strongly reduce support for the government. This effect is stronger among individuals that are more negatively affected by depreciation, and it is moderated by individuals’ perceptions of their personal economic situation. This evidence suggests that international financial shocks can strongly influence the opinions of average voters, and it provides further support for pocketbook theories.

What Did Central Banks Learn from Financial Crises?

During the global financial crisis (GFC) of 2007–2009 and the currentCovid-19 debacle, central banks acted quickly, boldly, and effectively. The paper argues that they did so thanks to the lessons learned from the past financial crises, which provided them with opportunities to reconsider their previous beliefs. A case in point is the banking crisis in the United States during the Great Depression of the 1930s that taught central banks to act rapidly and decisively in order to prevent an initial liquidity crisis from escalating into a solvency crisis leading to bankruptcies of banks with potentially disastrous consequences for the entire economy. The paper revisits the consequences of the currency crises of the 1990s, which transformed exchange rate regimes across the world: the EMS one of 1992–1993 that accelerated the launch of the euro, and the Asian one of 1997–1998 resulted in the proliferation of floating exchange rates in emerging economies.

The Political Economy of the Profitability Crisis in Britain

This chapter provides a historical overview of the profitability crisis that undermined the postwar economic boom, gave rise to the phenomenon of stagflation, and ultimately drove the financial liberalizations explored in this book. This chapter puts forward a novel historical categorization of British stagflation, by identifying two distinct phases within Britain’s experience of the global profitability crisis. The first, from 1967 to 1977, was characterized by low rates of profit, rising inflation, and repeated current account imbalances that resulted in currency crises. The second, from 1977 to 1983, still saw low profitability and high inflation, but the rising price of sterling ensured that there were no sterling crises. The chapter then details how governments combined governing strategies of depoliticized discipline and palliation in different ways during these two periods of acute crisis in order to navigate the contradictory imperatives of global competitiveness and domestic legitimacy. Policies of financial liberalization constituted attempts to support these strategies.

Competition and Credit Control

This chapter explores the 1971 Competition and Credit Control financial liberalization, which saw the British state relinquish most of its direct controls over credit creation and instead rely on interest rates to govern lending. In the 1960s, Britain’s worsening trade performance had resulted in a series of currency crises, to which Harold Wilson’s government responded in 1967 by devaluing sterling. In aid of devaluation, the government enacted a series of contractionary measures. An important element of this disciplining strategy was the tightening of monetary policy through state-imposed lending ceilings. However, people proved resistant to this reduction in their living standards, and thus endeavoured to combat income losses by extending their bank borrowing. Further, due to falling profitability, companies faced a liquidity crisis that threatened to derail the export recovery. As such, the state authorities sought to use the lending ceilings to both restrict credit to persons and extend credit to companies. This hybrid disciplining/palliation strategy was extremely difficult to operate with the blunt monetary instruments at hand. In addition, the lending ceilings were becoming increasingly politicized. Consequently, the Treasury and Bank sought to discover a better system of monetary governance. It was the Bank that designed the uniquely arm’s-length CCC proposals. Yet these proposals were accepted by the Treasury and government in significant part because they appeared to offer a depoliticized mechanism through which the state could redistribute credit resources from persons to companies in aid of augmenting Britain’s world market competitiveness in a moment of intensifying crisis.

Myths and Memory

‘The treatment of devaluation as if it were tantamount to hauling down the flag is really very silly’, wrote the Westminster Bank’s economic advisor, R. J. Clark in 1968. Yet, one cannot escape the impression that, on the occasion of the different currency crises that since the gold standard abandonment of 1931 invested the British economy during the twentieth century, the debate went well beyond the decision to produce ‘a change in the price of sterling in terms of other currencies. A technical change made for technical reasons’. The troubles with the pound during the twentieth century, particularly after the Second World War, have attracted the attention of political economists, political, international, and economic historians. Rather than reviving one of the most debated issues in British historiography, this chapter seeks to understand whether the memory of the 1931 abandonment of the gold standard—the ‘mother’ of all currency crises of the twentieth century—played a role on the occasion of other (loosely defined) currency crises. The focus of this chapter is on the 1967 devaluation. In line with this book’s aim to reflect on how and by whom financial crises have been remembered, and what use has been made of the memory of financial crises, this chapter will be looking at the actors remembering and using the events of 1931 in the 1960s, particularly within the Labour party.

Output Losses from Currency Crises and the Role of Central Bank

Generally, one of the important issues related to currency crises is the output losses caused by these phenomena. In this study, determinants of output losses and particularly the role of the central bank will be evaluated during currency crises. Moreover, the paper tries to investigate the roles of macroeconomic variables and also monetary, fiscal and exchange rate policies on the output losses during currency crises. In this regard, an econometric model with panel data has been used for emerging market countries during 1980-2016. The results show that currency crises accruing have a positive and significant effect on output losses. While the successful defence of central bank has had the negative effects on the output losses, but it is positive for the unsuccessful defence and the non-intervention or immediate depreciation. However, the role of the macroeconomic condition is important where total foreign reserves can be considered as a buffer against the output losses, while inflation and deviation of the real exchange rate from its trend have had positive effects on the output losses. Finally, the output losses can be reduced by an active monetary, fiscal and exchange rate policies.

A Monetary-Fiscal Theory of Sudden Inflations and Currency Crises

Treating nominal government bonds like other bonds leads to a new theory of sudden inflations and currency crises. Holmstrom (2015) and Gorton (2017) describe bonds as having costly-to-investigate opaque backing that consumers believe is sufficient for repayment. Government bonds' nominal return is their face value, their real return is determined by the government's surplus. In normal times, consumers are confident of repayment but ignorant of the true surpluses that will fund that repayment. When consumers' belief in real repayment wavers, they investigate surpluses. If consumers learn surpluses will be insufficient to repay bonds in real terms, the price level jumps. This explains why we observe inflationary crises, but never deflationary.