On Capital Flows and Macroeconomic Performance: Evidence Before and After the Financial Crisis in Turkey

The paper sheds light on the Turkish experience of capital account liberalization and its effect on key macroeconomic variables, using quarterly data in a multivariate autoregressive vector (VAR) model. We also take into consideration the crisis breakpoint in 2001 and estimate the effect of shocks attributed to capital flows, using quarterly data during the sub-periods 1989:01–2001:01 and 2001:02–2009:03. The findings indicate that capital flows have varying effects on the Turkish economy before and after the crisis in 2001 and the evidence supports significant effects of freeing financial flows on macroeconomic performance, especially during the post-crisis period (2001:02–2009:03). Specifically, this latter period exhibited less money growth and inflationary pressures, reflecting better management of public finances, which helped to stem the appreciation of the real exchange rate and preserve export competitiveness. Finally, there is significant evidence of sterilization policy that has aimed to curtail the effects of capital inflows on the exchange rate and domestic liquidity.