Crisis and self-fulfilling expectations: The Turkish experience in 1994 and 2000-2001

Ünay Tamgaç

International Review of Economics & Finance, 2011, vol. 20, issue 1, 44-58

Abstract: In this paper we analyze the role of fundamentals and self-fulfilling expectations in the crisis episodes of Turkey in 1994 and 2001. The question is how much of the occurrence of a crisis can be attributed to market expectations and how much to fundamentals. The model is estimated using a Markov switching framework in which the devaluation expectations affect crisis probability via three different specifications. Such a framework which allows for sunspots performs better than a purely fundamental-based model. The study shows that besides the fundamentals in the economy, shifts in agents' devaluation expectations have played a crucial role and that a Markov switching model with constant transition probabilities provides better estimates for the Turkish currency crises.

Keywords: Currency; crises; Exchange; rate; regime; Turkey; Self-fulfilling; expectations (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:20:y:2011:i:1:p:44-58

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