Measuring the Impact of Financial Crisis: A Financial Stress Index for Turkey

Measuring the Impact of Financial Crisis: A Financial Stress Index for Turkey

İsmail Yıldırım (Hitit University, Turkey)
DOI: 10.4018/978-1-4666-9484-2.ch013
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Crisis in 2001 and global financial crisis in 2008 effect Turk economy in a lot of ways. Financial crisis creates destructive effect especially on increasing market economies. It is not so easy to watch occurring of this financial crisis and determining of its expanding. First of all determining of crisis terms are needed to predict of financial crisis. In this part, a financial stress index is composed by using TL interest rate and monthly data of global gross reserves belongs to $/TL exchange rate between 1997:01-2014:12 terms for Turkey. Months when financial stress index raised to top level for Turkey and financial crisis are observed on, are found as February(2001) and November (2008).
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A crisis which could be happen in an economy, taking hold of all sectors arises from an event or a definite sector. Source of crisis is originated from whatever event or sector. As a result, this negatively effects production in real sector and employment. Financial crisis can cause long term decrease of prosperity of most people. Decreasing of this negative effect at least, is needed to effectively apply at the right selection of economic policies at the earliest time possible.

Fluctuations in economies are not seen as a crisis. Definition of economic shrinkage as well accepted in literature, is decreasing two quarter of a years in a row in gross domestic product. In developing counties such as Turkey, falling short of savings and foreign source dependency increases financial fragility.

Fluctuations happening in the global market, could affect Turkey’s financial markets negatively. Because of stress occurring in national and global financial markets, prediction of decreasing two quarter of a years in a row in gross domestic product is important as a financial crisis which could happen, negatively effects society’s prosperity. Decreasing effects created by financial stress is at least related with its prediction. Financial stress terms are determined by helping various financial variables. Variables used can differ from country to country with the purpose of determining financial stress. To illustrate, countries of foreign-source dependencies have the importance of determining their savings in expenditures in financial stress terms.

Financial stress index occurrence with the purpose of determining financial stress terms have lots of benefits. By means of possible shrinkage’ prediction, this provides policy precautions. Financial stress factors created by shrinkage allows for determining relative contribution. This determination helps the selection source of issue oriented economy policy organs. Also, determining sensibility limits related in calculated index incrementally allows implementation of economic policies. Besides, it enables calculated index’s decomposition of domestic and foreign sources and it helps determining economic policies in this context.

This section is composed of two parts. In first section, theoretical information about financial stress index is given by mentioning financial crisis in Turkey. In the second section, financial stress index is proposed for Turkey.

Monthly data is used in this analysis given in the study and this is comprised in 1997:01-2014:12 terms. The major property of this term is that both domestic and foreign originated shrinkage was experienced in that same term in Turkey. Those two major shrinkages were experienced in this short term providing proper data for empirical study.

In this study crisis is defined as an index named ‘financial stress index’ in the literature by obtaining an average of TL interest rate and ratio of percentage change of gross foreign exchange reserve in the central bank of the Turkish republic in $/TL exchange rate. Rise for $/TL exchange rate and ratio of percentage change interest rate and decrease for ratio of percentage change net foreign exchange reserve in central bank of the Turkish republic, causes the development of this index. In the study, existence of a financial crisis is accepted in the term when these indexes exceed the determined threshold value, in the contrary case, there was no financial crisis.

Key Terms in this Chapter

Interest Rate: Interest rate is the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors).

Foreign-Exchange Reserves: (also called Forex reserves) In a strict sense, only the foreign-currency deposits held by national central banks and monetary authorities.

NASDAQ: Commonly known as the NASDAQ, is an American stock exchange.

Exchange Rate: Between two currencies is the rate at which one currency will be exchanged for another.

Currency Crisis: There is no widely accepted definition of a currency crisis, which is normally considered as part of a financial crisis.

Subprime Mortgage Crisis: The subprime mortgage crisis arose from 'bundling' American subprime and American regular mortgages into MBSs which were traditionally isolated from, and sold in a separate market from prime loans.

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