Leading Indicators of Turkey’s Financial Crises

Abstract

This paper empirically investigates the leading indicators of the 1994, 2000/2001, and 2009 Turkish financial crises by applying stepwise regression and probit and logit models to three sets of quarterly data. Empirical findings show that although there are a common set of leading indicators, including current account balance, domestic debt, exports, external debt, and real effective exchange rate, the three crises in Turkey are different in structure, and each has different characteristics with different leading indicators due to changes in the nature of the Turkish economy. Our findings indicate that at the current state of the Turkish economy, several fundamental macroeconomic variables, banking sector stability, and global economic developments are the main leading indicators for the crisis. Policymakers could minimize the risk of financial crises by imposing tighter regulations on banks to avoid default and credit risk, following liquidity levels in the markets, and closely following the stability of global economic indicators. © 2022, The Author(s), under exclusive license to Springer Nature Switzerland AG.