International Capital and Growth Nexus in Turkey


In the figure above, I report the cumulative distribution functions of GDP growth in Turkey and the Capital Inflows to Turkey. So similar, no?

In a recent article, I and Ahmet Yilmaz of Marmara University have shown that the GDP growth in Turkey is highly dependent on the international capital. "OK", you may say, "Highly"... But what does "Highly" mean in this context?


Well, we first gathered detailed data for the capital inflows to Turkey from 1991 (this is the first date we could reach detailed quarterly data. Besides Turkey completely removed the capital account controls in August 1989) to Q3 2012. In the capital inflows, we included net errors and omission figures as well since net errors and omission numbers can be very (I mean very) high for countries like Turkey where substantially large amount of unregistered cross border trading activity exists.


And we formally compared the capital inflows data with the quarterly GDP growth data (YoY). The result is capital inflows Granger cause growth in Turkey but reverse causation does not hold! Plus, 44% of the variation in Growth can be attributable to the shocks to the capital inflows to Turkey!!


In a second paper, I am currently writing with Hasan Selcuk of Marmara University again, we have found that there exist nonlinear volatility interactions between the capital inflows and growth as well. Volatility is spilling over from capital inflows to growth in Turkey according to the Dynamic Conditional Correlation GARCH model we adopted in the paper with Hasan Selcuk.


In sum, what we have at hand is as follows:

- GDP growth in Turkey is dependent on capital inflows from abroad. Capital inflows cause growth but not the other way round.
- And there are volatility interactions between the two. Volatility spills over from capital inflows to growth. But not the other way round.

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