However, the other side of causality has not been mentioned much. Economic instability triggered by inflation is one of the main factors that leads to political instability. In other words, political instability creates inflation and inflation invokes political instability. Hence, high inflation and political instability create a vicious circle. When we look at the effects of high inflation on the economic sphere, we see that deposit savers put most of their savings into unproductive areas such as foreign currency and real estate with the aim of protecting themselves from the impacts of an inflationary environment. However, keeping most of their savings as foreign currency has achieved nothing and created real revenue loss. This is due to the fact that for economic units, the long-term revenue of foreign currency remained below the revenues of Turkish lira assets, despite devaluations in the Turkish lira. When we look at this from the investment angle, since there is a kind of tax burden on investments, this creates an additional cost for investors and causes seasonal volatility in investment. This leads to diversifications in economic growth rates. As a result, growth rates drop in countries experiencing high inflation in the long-run, moreover the quality of growth deteriorates. The average growth in the last 20 years in Turkey has lagged behind most of the developing countries. In our country, continual high inflation, apart from having a negative impact on economic growth, has led to the erosion of the quality of products and services and has caused an unrelenting regression in our competitiveness.

Secondly, due to the development of the derivatives markets, the foreign trade level in a floating exchange rate regime will be the same as the level in a fixed exchange rate regime. Hence, exchange rate risk will not affect the level of foreign trade3. Turkish derivatives exchange (Turkdex) In this framework, the effective operation of derivatives markets is for enabling economic agents to hedge their balance sheets from exchange rate risks under the floating exchange rate regime. Macroeconomic stability and the structural transformation process have provided our economy with a  3  Baron D. (1976). Flexible Exchange Rates, Forward Markets and the Level of Trade. The American Economic Review. Vol. 66. No. 3. BIS Review 36/2005  19  sound environment for risk management. And, the establishment of the Turkish Derivatives Exchange has been an important step taken on the way. It would be useful to reiterate the potential favorable effects of derivatives markets on our economy. First of all, derivatives markets offer economic agents the facility of risk management and make their future revenue flows predictable. Moreover, expectations can be measured and reflected on prices through these markets. This, in turn, increases the predictability and efficiency of spot markets. In this way, market prices provide economic agents with accurate information and excessive volatility decreases. Analyzed in terms of their impact on the real economy, the use of derivatives markets increases resistance to shocks in the economy as a whole as it reduces weaknesses resulting from the imbalance on firms’ balance sheets.