The relationship between financial capital movements and exchange rate in Turkey

International capital movements that reached the large volume today has become a fundamental dynamic affecting the indicators in national economies. In this context, fluctuations in economies caused by financial capital movements, especially in the framework of their effects on the foreign exchange market, emerge as an important problem. In order to solve this problem, capital movements towards the country should be managed effectively. Therefore, the impact of financial capital movements towards Turkey on the exchange rate was analysed in our study. Thus, it is aimed to contribute to the design process of capital movements management policies as a result of increasing knowledge on the effects of foreign capital through the foreign exchange market channel. The impacts of financial capital movements towards Turkey on exchange rate were investigated using ARDL method based on the quarterly data for the period 2009-2019. Empirical findings show that financial capital movements play a much more dominant role in the determination of the exchange rate in the foreign exchange market compared to international business transactions. In addition, while financial capital movements decrease the exchange rates in the short term, due to the risks arising from the appreciation of the domestic currency, it causes the exchange rate to increase in the long term. In financial capital movements, on the other hand, other investments play a greater role than portfolio investments. When empirical findings are evaluated in terms of policy inferences, it is clearly indicated that the management of financial capital movements that has a dominant role in the foreign exchange market in Turkey is a major necessity in terms of exchange rate stability. Accordingly, more stable physical capital movements should be encouraged rather than financial capital movements. In addition, in the financial capital movements towards Turkey, it is also an important policy option to have a larger volume of portfolio investments, reducing the share of other investments.