Crisis and self-fulfilling expectations: The Turkish experience in 1994 and 2000–2001 |
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| Authors: | Unay Tamgac |
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| Institution: | 1. Institute of Economics, Academia Sinica, Taiwan;2. Department of Economics, National Central University, Taiwan;3. Department of Economics, National Dong Hwa University, Taiwan;4. Department of Economics, Soochow University, Taiwan;1. FernUniversität in Hagen, Faculty of Business Administration and Economics, Chair for Macroeconomics, Universitätsstr. 11, Hagen D-58097, Germany;2. Kiel Institute for the World Economy, Hindenburgufer 66, Kiel D-24105, Germany;3. Ludwig-Maximilians-University Munich, Faculty of Mathematics, Computer Science and Statistics, Chair for Statistics and Econometrics, Akademiestr. 1/I, Munich D-80799, Germany;4. Chemnitz University of Technology, Faculty of Economics and Business, Chair for Empirical Economics, Thüringer Weg 7, Chemnitz D-09126, Germany |
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| Abstract: | In this paper we analyze the role of fundamentals and self-fulfilling expectations in the crisis episodes of Turkey in 1994 and 2001. The question is how much of the occurrence of a crisis can be attributed to market expectations and how much to fundamentals. The model is estimated using a Markov switching framework in which the devaluation expectations affect crisis probability via three different specifications. Such a framework which allows for sunspots performs better than a purely fundamental-based model. The study shows that besides the fundamentals in the economy, shifts in agents' devaluation expectations have played a crucial role and that a Markov switching model with constant transition probabilities provides better estimates for the Turkish currency crises. |
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