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An Early Warning Signals Approach to the Currency Crises: The Turkish Case

Ali Ari ()

No 1045, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: The global economic and financial instability context of the 1990s and 2000s also affected the Turkish economy. Actually, the 1980s in Turkey are characterized by a radical transformation of its economy through significant efforts of liberalization. With an out-looking economy and a liberalized financial system in the early 1990s, Turkey was an example of successful liberalization process for the other developing countries. However, this "remarkable" liberalization process, which was performed without ex ante correction of persistent macroeconomic imbalances, worsened economic and financial instabilities and caused two severe crises in April 1994 and February 2001. This paper aims to illustrate the essential causes of these crises by developing a binominal and multivariate logit model which estimates the predictive ability of 16 economic and financial indicators in a sample that covers the period January 1990-December 2002. In addition, the paper evaluates the out-of-sample forecast performance of the model in the period January 2003-December 2008 in which two other currency crises occurred in May 2006 and October 2008. The paper finds that the Turkish crises are mainly due to excessive budget deficits, high money supply growths, sharp rises in short-term external debt, growing riskiness of the banking system (in particular currency and liquidity mismatches), and external adverse shocks.

Date: 2009
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