DETERMINANTS OF HOT MONEY FLOWS AND PATTERNS OF ACCUMULATION IN THE POST-1990 TURKISH ECONOMY

Erol BALKAN (Hamilton College, USA)
Gül BIÇER (Bilkent University)
Erinç YELDAN (Bilkent University)

In this paper we investigate the determinants of short-term foreign capital inflows for Turkey following its capital account liberalization in 1989. We identify capital inflows exclusively with the portfolio investments of residents and non-residents abroad, and, using time-series econometrics, we search for the macro economic variables that best explain the behavior of capital inflows over 1992 to 2002. We further investigate the changing nature of the private investment function under post-capital account liberalization and deduce hypotheses on its correlation with capital flows and the key macro economic prices, such as the exchange rate, the real rate of interest, and real wages. Our results suggest that financial capital inflows have a significant negative correlation with the industrial production index, and are positively correlated with real currency appreciation and trade openness. We also found that the capital inflows have a positive relationship with the stock market index and with the onemonth lagged value of inflows themselves. Fixed private investment was found to have a positive relationship with financial capital inflows, but this was observed to be mostly due to an accumulation pattern towards non-traded sectors via currency appreciation. Real wage costs were observed to carry a significant negative relationship with private investment, indicating that at a time of currency appreciation, investors had to rely on declining wage costs in order to keep their export competitiveness. Under the volatile and uncertain conditions of speculation-driven investment patterns, the downward flexibility of real wages has to be seen as a concomitant factor of the post-financial liberalization episodes.