The effects of financial risks for the Turkish reel markets:The analysis on the transmission mechanisms

One of the major debates in the economics theory is whether monetaryand financial variables are effective on real economic variables. Regarding theQuantity Theory of Money, Classic, Neo-Classic and Monetarist economistsaccept that there are no real effects of monetary variables. For this reason, theseeconomists argue that financial risks have no real effects either. However,Keynesian economists try to display that monetary variables have real effectssince money can also be demanded for speculative aims. In addition toanalyzing money?s real effects, Keynesian economists also analyze effects offinancial variables depending on the developments in the financial markets.Post Keynesian economists give special emphasis on capital markets,while New Keynesian economists attach importance to financial intermediariesand credit variables. Post Keynesian economists include balance sheets ofeconomic decision making units into their analysis when they investigatefinancial crisis and the reasons of these crises. In this way, they demonstratehow changes in the financial prices lead to basis process behind financial crises.New Keynesian economists present that the effects through banks creditchannel arising from increase in bank reserves are different from the effectsthrough IS-LM curve approach. This approach offer important tools regardinganalysis of the real effects of exchange rates and liquidity risks.There has been a structural shift in financial markets after 1980?s inTurkey. The final stage of this shift was the start of full convertibility in 1989.Unfortunately, Turkey moved to this final stage before fulfilling the necessaryeconomic conditions. During this shift, there had been some changes in thebalance sheets of economic units. These changes had increased the real effects ofrisks arising from the fluctuations in the financial prices due to high rates ofinternal debt financing needs of the State.In this thesis, we try to examine the effects of financial risks on theproduction and investment of real sector arising from the fluctuations in thefinancial prices in Turkey. VARFIMA methodology is preferred as aneconometric instrument since this methodology enables to analyze these effectscoherently. VARFIMA methodology also allows the analysis of non-linearprocesses. Furthermore, it is possible to use VARFIMA to evaluate the risks andthe shocks arising from these risks in the sense that whether they are permanent(stable) or not.The empirical findings can be summarized as follows. The effect of netinternal debt financing of the State in Turkey leads to a decrease in the level ofinvestments in the real sector. The shocks coming from both exchange rate andinterest rate variables cause a permanent decline in the levels of investment andproduction of the real sector. Financial openness has a negative effect on thewelfare. This finding is also an evidence for the position of Turkish households,i.e. they are not participating to the international financial markets. The reasonfor the transmission of financial risks to real sector can be due to the separation(de-merge) of financial operations (transactions) from real sector activities. Therationale behind the introduction of new financial tools and techniques forfinancial risk management is increasing financial transactions. These situationsweaken the efficiency of both monetary policy and tools.Key Words: (1) VARFIMA, (2) Exchange Rate Risk, (3) Interest Rates, (4)Bank?s Balance Sheet Channel, (5) Credit Channel, (6) Post Keynesian and NewKeynesian Economists