Effects of international capital inflows on the Mirkish economy

Abstract

The main objective of this study is to investigate the effects of international capital inflows on the Turkish economy. Capital inflows, it is argued, can trigger both private consumption and investment expenditures. Increased consumption demand results in an increase in the relative prices of nontradable sectors with respect to tradable sectors. This eventually leads to a change in the composition of investments in favor of nontradable at the expense of tradable sectors. Increased investment in nontradable sectors does not contribute to the foreign exchange earning capacity of a country, and, given such, a country eventually becomes more vulnerable to currency shock. This can trigger major problems, such as significant capital outflows, large current account deficits, currency crisis, and economic contraction.