Evaluation of financial instability from Minsky perspective in Turkish economy

This thesis has a heterodox approach which discusses the question of whether the mainstream economic policy capable of solving the problem of capitalism that global financial crisis has rekindled. Capitalist system practice reveals the ideological contradiction of neo-classical economic policies. This thesis contains an analysis of the assumptions considered solid core of the mainstream economic analysis are questioned again, the state's role in the economy is discussed and the traces of argument that modern capitalism is driven capitalism is followed. In the economic literature, fluctuations in the capitalist economy are began to explain by financial instability, when capitalism and hence financial markets evolved. Not every instability experienced in the financial markets results in a crisis, but instabilities express the economic fluctuation tendency. According to the Minsky's financial instability hypothesis, expenditure-financing relationship in a capitalist economy is a source of instability in itself, beyond the increasing instability. During the expansion of the economic conjuncture, increase in bank credits and accumulation of debt in non-financial sector increase the credit risk in the banking sector and the fragility of the financial sector. Financial fragility increases the risk of financial crisis and systemic risk by creating instability. The rising phase of the economic conjuncture constitutes an environment in which economic actors are increasingly willing to borrow and lend because of optimistic expectations. This optimistic phase of expectation is the seed of next fragility or crisis period. Therefore, according to Minskian financial instability hypothesis, financial crisis is mainly a process originating from the internal dynamics of the economy. The aim of this thesis is to explain the financial instability/fragility of the Turkey's economy with the Minskian financial instability hypothesis. When considered from the point of view of the Turkey's economy, it was thought that it would be useful to examine financial instability problem in terms of financial markets and make a comparative analysis with the world economies because Turkey is among the countries that experienced financial crisis. In this context, our work has been included in two separate analysis. In the first analysis, in order to determine the existence of financial instability in Turkey's economy, in terms of Minsky's financial instability hypothesis, VAR model has been estimated for 1998-2016 period. The obtained results have demonstrated sufficient explanatory power of Minsky's financial instability hypothesis to investigate the sources of instability in Turkey's economy. In the second analysis, to evaluate the probability of financial fragility or crisis, panel probit model analysis has been conducted over a wide range of countries (a total of 23 countries). The obtained results have demonstrated, this model of financial fragility and the explanatory variables are appropriate to use to describe the probability of fragility or crisis in countries which have high level of financial fragility.