Financial Crises' Prevention And Recovery

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Executive Summary

After the completion of the capital account liberalization in 1989, Turkey recovered from two financial crises which occurred in 1994 and 2000/2001. Focusing on the twin crises dynamics, this paper delves into the roles of the banking system soundness and the political stability in the design of preventive and recovering economic policies. Using a non-linear Markov switching model, the authors show that an Early Warning System (EWS) should take in account not only the classic macroeconomic fundamentals but also the banking system financial vulnerability (foreign exchange risk, interest rate risk, and higher public assets holding) as well as the degree of the political instability.

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