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Financial Crises’ Prevention and Recovery

  • Wajih Khallouli
  • Mahmoud Sami Nabi

    ()

    (LEGI–Tunisia Polytechnic School and University of Sousse, IHEC)

After the completion of the capital account liberalization in 1989, Turkey recovered from two financial crises which occurred in 1994 and 2000/2001. Focusing on the twin crises dynamics, this paper delves into the roles of the banking system soundness and the political stability in the design of preventive and recovering economic policies. Using a non-linear Markov switching model, we show that an Early Warning System (EWS) should take in account not only the classic macroeconomic fundamentals but also the banking system financial vulnerability (foreign exchange risk, interest rate risk, higher public assets holding) as well as the degree of the political instability. Besides, we identify three tools of recovering policies: i) reducing the interest rate mismatch, ii) encouraging the exchange risk hedging, and iii) reducing the political instability.

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Paper provided by Economic Research Forum in its series Working Papers with number 529.

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Length: 25 pages
Date of creation: Jun 2010
Date of revision: Jun 2010
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:529
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