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No AccessPolicy Research Working Papers25 Jun 2013Capital Flows, Macroeconomic Management, and the Financial System: Turkey, 1989-97Authors/Editors: Cevdet Denizer, Oya Celasun, Dong HeCevdet Denizer, Oya Celasun, Dong Hehttps://doi.org/10.1596/1813-9450-2141SectionsAboutPDF (0.2 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:July 1999 Between 1989-97, large private capital flows to Turkey contributed to economic growth. Yet chronic and high fiscal deficits - coupled with an inconsistent financial sector regulatory framework - left the banking system and the economy vulnerable to capital flow reversals and external shocks. 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. Celasun, Denizer, and He analyze the Turkish experience with capital flows in a macroeconomy 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 Turkish banking 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. This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to examine the relationship between capital flows and economic management. The authors may be contacted at [email protected], [email protected], or [email protected] Previous bookNext book FiguresreferencesRecommendeddetailsCited byAn Assessment of The Effectiveness of Sterilization of Central Bank Interventions: Empirical Evidence from IndiaPrague Economic Papers, Vol.31, No.5The shape of sovereign yield curve in an emerging economy: Do macroeconomic or external factors matter?Empirica, Vol.47, No.110 May 2018China as a reserve sink: The evidence from offset and sterilization coefficientsJournal of International Money and Finance, Vol.29, No.5Managing the Monetary Consequences of Reserve Accumulation in Emerging AsiaGlobal Economic Review, Vol.37, No.2 View Published: July 1999 Copyright & Permissions Related RegionsEurope and Central AsiaRelated CountriesCzech RepublicIndonesiaRelated TopicsFinance and Financial Sector DevelopmentMacroeconomics and Economic GrowthPrivate Sector Development KeywordsBANKING SYSTEMCAPITAL ACCOUNTCAPITAL FLOWSCAPITAL INFLOWSEMERGING MARKETEMERGING MARKET ECONOMIESEXIT MECHANISMSFINANCIAL SUPPORTFINANCIAL SYSTEMINFLATIONINTERESTINTEREST RATESINTERNATIONAL FINANCELOCAL BANKSMACROECONOMIC MANAGEMENTMARKETSMONETARY FUNDPOVERTYPUBLIC FINANCESTRANSPARENCY PDF DownloadLoading ...
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