Need for anchor
that the staff that will implement a program that IT IS OBVIOUS promises to return to reasonableness in the economy will not take the helm of the ship immediately after the election. It will take a while. What can happen during that time? It’s a harder question to answer. But let me give it a try.
One reason for the difficulty is that the gap between the market rate of foreign exchange, known as the Grand Bazaar rate, and the official rate determined in the interbank foreign exchange market has widened considerably. We haven’t been using the term official rate for decades, unfortunately we started using it. This characterization is a clear indication of a strangeness. This difference between the two exchange rates is the main leading indicator of a well-known model (first generation crisis model), which was developed long ago to explain currency crises, especially in Latin American countries, that if no action is taken, the exchange rate system will collapse. Therefore, one more question could have been added to the introduction of the article and asked whether there was a risk of a currency jump before the election.
I assume this risk will be prevented from happening. Even this assumption implies that the pressure on the exchange rate is likely to increase immediately after the election. Yes, it is, but it’s worth going a little deeper. Let me first consider the situation in which the People’s Alliance will win both elections; because it’s easier. In this scenario, if the current policy persists – which was my first sub-scenario, currency explodes. They’re probably seeing it themselves. Then, the second sub-scenario is more likely to happen: Semi-normalization. In particular, taking steps towards stability but preserving the institutional structure as it is. For example, never touching the legal system or the Central Bank Law. Even semi-normalization steps prevent the exchange rate from exploding.
The question that is difficult to answer is about what will happen in the period until the Nation Alliance wins both elections and takes office. Instead of speculating, it is useful to think about what can be done to minimize the negative effects that may occur. Strong anchors are needed to prevent the ship from being dragged into turbulent waters during that time. The first anchor would be to strongly raise the economic program that this alliance has made public, and of course programs in other fields. It can be very helpful to explain which steps will be taken on which day within the framework of these programs. Statements on monetary policy serve as another anchor. The names of the Central Bank management and the Monetary Policy Committee (MPC) can be announced, and the decisions to be taken on the first day can be announced to the public by holding a shadow MPC meeting. If the presidential election gets to the second round, such a step may have its drawbacks, but it is worth considering. It will be useful to find other anchors.