The problem of financial instability and the case of Turkey in the context of economic policy

The growing financial markets and the integration of domestic markets to the international financial system through the financial liberalization have made the national financial structures more vulnerable to the changes in the economic variables. Under these circumstances, financial instability has been appeared as a remarkable problem especially for developing countries. The social and economic costs that are caused by financial instabilities and crises happened in the recent years have increased the importance of the phenomenon of financial stability for the central banks. Therefore, it is quite important to know how financial instability is affected by the domestic economic dynamics and the imposed economic policies. In this work, the concept of financial instability is evaluated theoretically. Moreover, the relations between the financial instability and the variables of economic policies such as monetary-fiscal variables are analyzed for the case of Turkey. In this context, the direction of financial instability reaction to the unexpected changes in the monetary and fiscal variables is examined. It has been found that interest rate, price level and public debt have notable interrelations. The volatility of high price level has negatory effects on financial stability. The impulse response functions given by the proper models of vector auto regressions show that the shocks to interest rate and public debt deteriorate the problem of financial instability. Keywords: Financial instability, financial crisis, monetary policy, fiscal policy, vector autoregression, impulse-response functions