Exchange Rate Bubble Formation in Türkiye: Revealing the Dance Between Reality and Speculation with Empirical Evidence from the Sequential ADF Tests

Abstract

This study investigates speculative bubble formations in Türkiye's foreign exchange market from February 2001 to September 2024, utilizing the GSADF and BSADF methods. Through empirical analysis, the study identifies three significant bubble periods—May 2018 to October 2018, September 2020 to November 2020, and November 2021 to March 2022—each shaped by unique economic and geopolitical pressures. In the context of these findings, while some fluctuations in the exchange rate align with fundamental economic indicators, a segment of volatility remains unexplained, indicating the presence of speculative bubbles. This unexplained volatility suggests that traditional indicators alone are insufficient to account for currency valuations, underscoring the need for policy approaches that consider both macroeconomic fundamentals and speculative influences. Notably, the rapid surge in the exchange rate observed in late 2021, culminating in a peak in December, was followed by a dramatic decline precipitated by the announcement of the exchange rate-protected deposit account by economic authorities. This sequence of events highlights the significant impact of policy interventions on speculative activities, as evidenced by the empirical analysis indicating that the exchange rate bubble, which peaked during this period, began to deflate rapidly thereafter, ultimately dissipating entirely by March 2023. The findings emphasize the critical importance of sustainable, structural economic reforms in stabilizing exchange rates, advocating for long-term policies that address root causes of volatility rather than relying solely on short-term interventions.

Keywords

• Türkiye Economy
• Exchange Rate
• Exchange Crisis
• Bubbles
• GSADF
• BSADF

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