The relationship between currency and banking crises in Turkey: A Markov regime switching model

The main objective of this study is to investigate the interaction of currency and banking crises in Turkey and testing for the presence of twin crises.In this context, the Speculative Pressure Index (ISP) and the Banking Sector Fragility Index (IFF) are used to analyze the relationship between currency and banking crises.In analyzing the relationship, MS-VAR model, which allows the use of crisis indices in continuous time, is used.In this study, after the stationarity of the variables were tested with ADF and PP unit root tests, the causality relationship between the variables was analyzed by Hacker and Hatemi-J (2006) causality test and Balcilar, Ozdemir and Arslanturk (2010) Boostrap Rolling Windows Causality Test.According to the econometric results, there is a bidirectional causality relationship between the Speculative Pressure Index and the Banking Sector Fragility Index. Therefore, it is concluded that the twin crises hypothesis is valid for Turkey.