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Capital flows, macroeconomic management, and the financial system - Turkey, 1989-97

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  • Celasun, Oya
  • Denizer, Cevdet
  • Dong He

Abstract

Recent developments in a number of emerging economies have heightened interest in the relationship between macroeconomic management and financial regulation, in an environment of open capital accounts and large-scale movements of private capital. The authors analyze the Turkish experience with capital flows in a macro-economy characterized by chronically high inflation and fiscal deficits. They study the relationship between capital flows, macroeconomic management, and vulnerability in the financial system. Their analysis highlights the importance of fiscal policy in an era of large capital flows. Fiscal imbalances contributed both to real exchange rate appreciation and high real interest rates in Turkey. The high interest rates the government must pay on domestic debt have become one of the key issues of Turkey's macroeconomic management. Only by reducing its interest expenses can fiscal deficits be reduced and greater stability be achieved. The Turkishbanking system, in becoming increasingly integrated with international financial markets, has become vulnerable to shifts in market confidence. Banks borrowed abroad in response to macroeconomic imbalances to benefit from high interest rates on domestic loans and government paper. In the process, the banks have exposed themselves to interest rate risk, to foreign-exchange risk, and to large credit risks. To reduce the Turkish economy's vulnerability to external shocks, financial regulation must be strengthened simultaneously with the achievement of macroeconomic stability.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2141.

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Date of creation: 31 Jul 1999
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Handle: RePEc:wbk:wbrwps:2141

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Keywords: Capital Markets and Capital Flows; Fiscal&Monetary Policy; International Terrorism&Counterterrorism; Economic Theory&Research; Banks&Banking Reform; Macroeconomic Management; Economic Theory&Research; Banks&Banking Reform; Financial Economics; Settlement of Investment Disputes;

References

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  1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  2. E. Murat Ucer & C. John McDermott & Pierre-Richard Agénor, 1997. "Fiscal Imbalances, Capital Inflows, and the Real Exchange Rate," IMF Working Papers 97/1, International Monetary Fund.
  3. Fernandez-Arias, Eduardo & Montiel, Peter J., 1995. "The surge in capital inflows to developing countries : prospects and policy response," Policy Research Working Paper Series 1473, The World Bank.
  4. Agenor, Pierre-Richard & McDermott, C. John & Ucer, Murat, 1997. "Fiscal imbalances, capital inflows, and the real exchange rate: The case of Turkey," European Economic Review, Elsevier, vol. 41(3-5), pages 819-825, April.
  5. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized Portfolio Capital Inflows in Emerging Capital Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," NBER Working Papers 5156, National Bureau of Economic Research, Inc.
  6. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  7. Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
  8. Pierre L. Siklos, 1996. "Capital Flows in a Transitional Economy and the Sterilization Dilemma," IMF Working Papers 96/86, International Monetary Fund.
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Cited by:
  1. Petroulas, Pavlos, 2004. "Short-Term Capital Flows and Growth in Developed and Emerging Markets Pavlos," Research Papers in Economics 2004:4, Stockholm University, Department of Economics.
  2. Layal Mansour, 2012. "Hoarding of International Reserves and Sterilization in Dollarized and Indebted Countries : an effective monetary policy?," Working Papers 1208, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.

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