Speculative Attacks under Financial Liberalization

This article aims at identifying the determinants of currency crises in Turkey for the post financial liberalization period (1980:01-2006:06). A broad set of explanatory variables were tested through signals approach and bivariate and multivariate logit regressions. The same procedure is then repeated for the post-capital account liberalization period (1989.09-2006:06). The results obtained are novel and deviate widely from the literature. Our findings suggest that conventional crisis indicators fail to provide a satisfactory explanation for crises. For the period spanning 1980:01-2006:06, only banking sector fragility index, short-term debt/international reserves, bank reserves/bank assets, US GDP, M1, and US 3-month T-Bill rate have been identified as significant leading indicators by both the signals approach and logit regressions. Analyzing the post-capital account liberalization period spanning 1989:09-2006:06 in isolation, we obtain strong evidence confirming the importance of US federal funds rate, banking sector fragility index, US GDP, and US 3-month T-Bill rate by both approaches. Overall, results confirm the significance of global economic conditions, and suggest that financial liberalization has rendered the Turkish economy vulnerable to currency crises. Given the high degree of international capital mobility, these results are also relevant for other emerging markets and for countries intending to liberalize.