Predictionability of financial crises with leading indicators: The case of Turkey

Studies on estimating financial crises have been in demand since the 1980s, when financial crises became more intense around the world. This study has been estimated whether financial crises are predictable or not for the Turkish economy. In the study, the period of 1990:01-2021:09 of the Turkish economy has been discussed. In order to make a quantitive definition of the dependent crises variable, based on study of Eichengreen vd. (1996), it has been constituted a foreign exchange market pressure index which consists of monthly changes in exchange rate, interest rate and international reserves. A set of leading indicators has been created based on the indicators that stand out in the studies in the literature and that have been determined to show significant changes during the crises experienced by the Turkish economy. These leading indicators are divided into three different groups as local, external and financial indicators. The Markov switching model was used to predict the financial crises in the Turkish economy. In the study, in which there is a two-regime model as crisis period and non-crisis (calm) period, three different models were created for each leading indicator set. In all models, the 1994, 1998, 2000-2001, 2008 ve 2018 crises experinced by the Turkish economy were successfully predicted. In addition, the model created with only financial indicators gave a crisis signal for the year 2020, when Covid-19 negatively affected the Turkish economy and increased its financial fragility. In the model created with local indicators, there were no variables that were found to be significant for both regimes. In the model of external indicators terms of trade, current account balances/GDP, real effective exchange rate, international reserves, domestic and foreign inflation gap, domestic and foreign interest rate gap; in the financial indicators model domestic credit/GDP, foreign deposits/total deposits, real interest rates, real effective exchange rate, international reserves and foreignd debt/reserves were found to be significant. Keywors: Financial Crises, The Turkish Economy, Leading Indicators, Early Warning Sysytems.