The relationship between financial liberalisation, hot money inflows, economic growth and current account deficit: The case of Turkey

Having embraced liberal policies with the Izmir Economy Congress and thus demonstrating not having a negative stance towards foreign investment, Turkey did not achieve its intended liberalisation due to being a newly established republic and the Great Depression of 1929. The country tried liberalisation once more in the 1950s but, with the currency crisis of the mid-1950s, reverted to protectionist policies. From 1960 onwards, statism was on the forefront as the economy was expanded through five-year development plans. However, due to reasons such as choosing models in the financing of industrialisation that lead to inflation and the inability of the industry to orient itself towards export, Turkey experienced a currency crisis again at the end of the 1970s. With this crisis, the 24th January 1980 decisions were implemented and steps were taken once more towards liberalisation. The 24th January decisions were followed by Decree No. 32 on the Protection of the Value of the Turkish Currency in August 1989. With this decree, the foreigners were allowed to directly and indirectly invest in Turkey. The markets where those with fund surplus meet those with funding gap are called financial markets. The financial system consists of the totality of financial markets, financial instruments, legal-institutional arrangements, and financial intermediaries. This study seeks to explain the overall structure of the financial system, as well as financial liberalisation and financial development, and examines the impact of hot money, which entered Turkey following capital movements that became allowed as a result of financial liberalisation, on economic growth and current account deficit. GDP, calculated according to the expenditure approach at fixed prices, current account deficit in USD and hot money inflows generated in USD are used as data. The series are quarterly series covering 1998Q1:2019Q2 period. First, the stationary test was applied to the series and the series with unit root problem were made stationary. Afterwards, a VAR model was established and the lag length was determined. After determining the lag length, the Granger Causality Test was applied to see whether there was a causality between the series and if there was, what direction it had. As a result, it has been found that there is a unidimensional causality from hot money inflows to GDP and current account deficit.