Assessment of the Vulnerability of the Turkish Economy

In this study we aim to evaluate the vulnerability of the Turkish economy during the 1998-2012 period by employing signals approach improved by Kaminsky, Lizando & Reinhart (1998) [KLR]. We consider more than thirty financial and macroeconomic variables and chose the best performing 18 variables according to KLR. The real interest rate differentials between Turkey and U.S. ranked first according to all criteria. Among the major indicators we have excess real M1 supply, hot money, IMKB 100, external debt stock/exports, output index, inflation, budget balance/GDP, exports, imports, terms of trade, M1 & M2, and real GDP growth. We also construct composite indicators to estimate the probabilities of crises in Turkey. According to our findings evenif none of the indicators are signaling, the crisis probability in the following months is 13.79%. Indeed, when only two indicators are signaling the crisis probability in the succeeding months exceeds 50%. These findings indicate that the Turkish economy is very fragile and any signaling indicator could be a significant sign of coming crisis. Hence it is important for Turkey to monitor the vulnerability of the economy across time.