The international capital flows and its effects on the Turkish economy (1986-1998)

IV ABSTRACT THE INTERNATIONAL CAPITAL FLOWS AND ITS EFFECTS ON THE TURKISH ECONOMY (1986-1998) AKACARAVCI M.A Thesis, Department of Economics, Supervision Prof. Dr. Erhan YILDIRIM September 2000, 126 pages This dissertation examined the capital inflows and outflows for a sample of Developing Countries including Turkey. It consists a close examination of the flows and general trends (CF) of capital to developing countries for several historical periods. Moreover, the effects of capital flows on the national economies of some developing countries, especially Turkey, are deduced by using some econometric methods. "What is the effects of capital flows on aggregate demand?" is the main starting point in analysing the effects of capital flows on the economy. The econometric analysis contains tests of hypotheses, which are prepared in accordance with the main question. Granger causality test indicates a two-way causality between current account deficits (CAD) and capital inflows for the Turkish economy. In addition, the short-run capital flow is the most sensitive type of capital to current account deficits. In the case of Turkey, current account deficits closed with, short-run capital inflows, and large volume of short-run capital flows in turn distorts the current account. Impulse-response functions of a Vector Auto-Regressive (VAR) Model demonstrates that, both the real and the monetary shocks deviate aggregate demand from its long-run equilibrium permanently but the magnitudes of the deviation is too small. Shocks lead to extremely volatile capital flows in and out of the economy. In the case of Turkey, capital inflow is used for financing government spending and import expenditures. Financing these deficits by using short run capital inflows may be only a temporary but not an appropriate and final solution for the leading economic problems. Keywords: Capital flows, Currency crises, VAR model.