Essays on investment, real exchange rate, and central bank in a financially liberalized Turkey
This dissertation investigates different but related aspects of the impact of global financial liberalization on macroeconomic changes and policy formation in a developing country. By using recent time-series econometric techniques for the Turkish case, three essays in this dissertation test the validity of some of the main arguments in favor of global financial liberalization supported by mainstream economic theory and the Bretton-Woods institutions.
Contrary to the arguments that emphasize the positive impact of capital inflows on investment and growth in developing countries, my results suggest that the excessive appreciation of the real exchange rate and its volatility that are often induced by capital flows curbed manufacturing investment in Turkey in the post-capital account liberalization period. The same results also demonstrate that rising financial fragility associated with higher short-term external debt stock in the private sector and overall external debt in the non-financial sector have generated systemic risk, and hence, lowered or postponed the investment decisions of the private sector in the presence of real exchange rate volatility.
Other results of my dissertation indicate the limits of monetary policy in dealing with the negative feedback of excessive real exchange rate appreciation and its higher volatility on investment. Since singling out price stability as the main objective of monetary policy in 2002, the Turkish central bank has not responded to the excessive appreciation of the real exchange rate under the inflation targeting regime. Its priority on low inflation rather than a competitive real exchange rate has resulted not only in lower manufacturing investment in the long run, but has also raised the overall risk in the economy by enabling private sector to accumulate external debt in the short run.
0511: Economic theory