CAPITAL FLOWS TO AN EMERGING FINANCIAL MARKET: TURKISH CASE STUDY

Şaziye GAZİOĞLU (University of Aberdeen)

Recent attacks on the foreign exchange market in February 2001 created a deep economic crisis in Turkey. We aim to explore various indicators of the financial crisis in Turkey based on a macro model.

Globalisation in Financial Markets implies that the share of the foreign investors in domestic stock markets has been increasing. We argue that the foreign share of the domestic economy is a key variable for a degree of vulnerability during a Global Financial Crisis. Our empirical investigation showed that the foreign share of the ISE has been increasing since 1995 and is about 50 percent of the total. Furthermore, the general index of stock market prices in 1999 was the highest figure since 1995.

Therefore, stock market price are other important indicator of the forthcoming financial crisis. We investigate the Turkish data and formulating a theoretical dynamic model. Sudden capital outflow would certainly cause exchange rates, balance of payments and international debt problems. Hot money inflow increase the stock market prices and keep the real exchange rate high. However, short stay implies sudden outflow that creates financial crisis. This results in international debt crisis and further loans from International Monetary Funds.