The international capital movements and their macroeconomic effects in the process of financial liberalisation:The case of Turkey

Nowadays one of the most important phenomena in the world economy is financial liberalisation applications. Liberalisation of capital movements, which started in developed countries at the end of the 1970s and in conjunction with 1980s it became widespread also in developing countries. In this period, on one hand, developing countries? need of foreign financial sources in order to realize economic development and on the other hand, the will of the creation of more profitable investment opportunities on the part of developed countries gave momentum and new dimensions.Parallel to financial liberalisation process in 1980s in the world, the liberalisation process in Turkish economy started with 24 January 1980. The process completed with the full liberalisation of capital movements in 1989. Removing all the restrictions on capital movements significantly increased the volume and flow of financial capital movements to Turkey. At the same time it raised the arguments about the positive and negative effects of these flows on macroeconomic indicators of the country.The purpose of this study is to analyse the effects of portfolio investments and short term capital movements in Turkish economy. More specifically, it is aimed to analyse the effects of portfolio investments and short term capital movements on chosen macroeconomic variables using cointegration analysis which is based on time series variables. The effects of short term capital movements and portfolio investments have been investigated by using monthly variables for 1992-2007 period with bound test and ARDL approach.As a result of the econometric analysis, it was found that in the long run, short term capital movements and portfolio investments cause to appreciation of national money effecting the current account balance negatively. In this context, a long run relationship between capital movements and money supply was not found. A relationship between portfolio investments and short term capital movements and interest rates have been found in the long run. However, results don?t lead us to have an absolute judgement about the nature of the relationship. Besides, it was found that in the long run portfolio investments increase the exchange reserves, the return of Istanbul Stock Exchange index and Istanbul Stock Exchange operation volume.Key Words: Financial Liberalisation, Portfolio Investments, Short Term Capital Movements, Financial Crisis, Capital Controls.