An Early Warning Signals Approach for Currency Crises: The Turkish Case

In the last fifteen years four crisis episodes occurred in the Turkish economy in April 1994, February 2001, May 2006 and October 2008. These local crises with minor effects on other countries led nevertheless to severe economic and social consequences in terms of increasing domestic interest rates, large international reserves losses, large currency depreciations, high output losses and high unemployment rates. This paper aims to illustrate the essential determinants of these crises by developing a binary and multivariate logit model which estimates the predictive ability of sixteen economic and financial indicators in a sample that covers the period January 1990-December 2008. The paper finds that the Turkish crises are mainly due to excessive budget deficits, high money supply growths, sharp rises in short-term external debt, growing riskiness of the banking system (in particular currency and liquidity mismatches), and external adverse shocks.