Predicting Crises in Turkey Using an Exchange Market Pressure Model and Four-Way Decomposition Analysis of Gross Capital Flows

Gokhan Goksu,Eyup Kadioglu,Guray Kucukkocaoglu

doi:10.5539/ibr.v8n11p26

Abstract

<p>This study examines quarterly macroeconomic data in an attempt to reveal crises experienced in Turkey from 1998 to 2013 using an exchange market pressure model and analyze gross capital flows using a four-way decomposition analysis during. The results indicate that the exchange market pressure model successfully predicts the economic crisis following the 1998 Marmara earthquake, the February 2001 crisis and the effects of the 2008 global financial crisis in Turkey. The four-way decomposition is found to be more effective than the standard two-part differential analysis in explaining the relationship between crises and the inflow and outflow of domestic and foreign capital.</p>

Highlights

Financial and economic crises are commonplace; studies proliferate and evolve examining international capital flows, one of their suspected causes
When analyzing crises in particular, it has become accepted that analyzing international capital flows using empirical models focusing on gross capital inflows and outflows in the balance of payments is a more appropriate approach than looking at net capital flow within an economy (Boratav, 2009; Janus & Riera, 2010)
In order to effectively analyze capital flows during crises, the gross capital flows within the balance of payments should be decomposed, and each type of capital flow during the crises should be analyzed in a comparative fashion (Boratav, 2009; Janus & Riera, 2010)

Summary

Introduction

Financial and economic crises are commonplace; studies proliferate and evolve examining international capital flows, one of their suspected causes. When analyzing crises in particular, it has become accepted that analyzing international capital flows using empirical models focusing on gross capital inflows and outflows in the balance of payments is a more appropriate approach than looking at net capital flow within an economy (Boratav, 2009; Janus & Riera, 2010). In order to effectively analyze capital flows during crises, the gross capital flows within the balance of payments should be decomposed, and each type of capital flow during the crises should be analyzed in a comparative fashion (Boratav, 2009; Janus & Riera, 2010). This type of study yields more realistic results for understanding international capital flows during crises because the flows are decomposed and analyzed according to their categories within the balance of payments prior to, during and following a given crisis (Boratav, 2002, 2009; Kraay, 2005; Lane, Gian, & Ferretti, 2007; Cowan et al, 2008; Janus & Riera, 2010; Rothenberg & Warnock 2008; Forbes & Warnock, 2012; Broner et al, 2011)

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Results

Conclusion