The impacts of the global crisis on the Turkish economy, and policy responses

Abstract

This chapter focuses on the impacts of the recent global crisis on the Turkish economy and the policy measures taken in response to the crisis. The Turkish economy was adversely affected by the crisis through three main channels, namely expectations, trade and finance. The distinctive characteristic of the crisis was a severe export shock, which can account for an important part of the decline in production in Turkey. Besides this, a sudden stop in financial flows worsened the credit conditions in the economy. As a result, the Turkish economy witnessed one of its worst economic downturns after the Second World War. In fact, the Turkish growth performance was one of the worst among developing countries. However, unlike previous crises, the financial markets in Turkey and many other developing countries did not experience a collapse. We argue that this is mainly related to the small magnitude and short duration of the financial shocks hitting Turkey and other developing countries relative to the ones in previous decades. In this sense, the Turkish economy might not have been fully tested during the last global crisis. How the economy will behave in case of a larger financial shock is still unknown.

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