Crises, Portfolio Flows, and Foreign Direct Investment: An Application to Turkey
Posted: 13 Mar 2012
Date Written: March 12, 2012
Abstract
We analyze how financial and economic crises affect the relation between the components of capital flows and their determinants in an emerging economy. Our results suggest that the composition of capital flows matters, crises can explain the volatility of portfolio flows and foreign direct investment, and modeling them as endogenous breakpoints improves the results considerably. By using data from the Turkish economy, we estimate these breakpoints together with the parameters of the model and find that they correspond to international and domestic crises that hit the country. Although both components are affected by similar crises, direct investment reacts strongly to the domestic crisis, while portfolios flows are more sensitive to global financial conditions. Breaks also have an effect on the significance and sign of determinants of each type of international investment. Evidence indicates changes in all coefficients in both investment types and suggests that analyses assuming parameter constancy lead to misleading results if they ignore the influence of endogenous breaks.
Keywords: Capital flows, Crises, Structural changes, Country risk
JEL Classification: F32, F36, G15
Suggested Citation: Suggested Citation