Liquidity and the Dynamic Pattern of Price Adjustment: A Global View

Foreign direct investment (FDI) is an important determinant of development. Thus, identifying the main drivers of investment is critical especially for emerging markets. The main aim of the article is to verify factors influencing FDI flows into Turkey. Research Design & Methods: Foreign investment can be affected by structural factors, such as growth and trade openness; stability factors, such as high fiscal deficits, inflation, and exchange rate changes; and global factors, such as the EU accession and the level of global liquidity. We examine the importance of these variables in affecting FDI flows into Turkey using quarterly data from 1992 to 2010 and cointegration and VECM methodology. Findings: We conclude that for Turkey (and perhaps other emerging markets) structural reforms that expand market size and trade opportunities yield more capital inflows than economic stabilisation efforts that address prices, exchange rates, and budget balances. Moreover, we find that during that period in Turkey, trade and investment were substitutes. Implications & Recommendations: Stabilisation efforts to control prices, exchange rates, and budgets matter, but not as much as structural reforms that impact market potential and trade flows. Contribution & Value Added: Previous literature generally finds that FDI and trade are complements in emerging countries. This was the case in Turkey as well in the eighties and early nineties. We show that the EU candidacy prospects have transformed the relationship between FDI and trade in Turkey. Article type:research article

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Factors Influencing Foreign Direct Investment Flows into Turkey

Binatlı

Sohrabji

2019

EBER

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The Importance of Global Shocks for National Policy Makers - Rising Challenges for Central Banks

Belke

Rees²

2009

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We analyze the importance of global shocks for the global economy and national policy makers. More specifically, we investigate whether monetary policy has become less effective in the wake of financial globalization. We also examine whether there is increasing uncertainty for central banks due to globalization-driven changes in the national economic structure. A FAVAR framework is applied to derive structural shocks on a worldwide level and their impact on other global and also national variables. We estimate our macro model using quarterly data from Q1 1984 to Q4 2007 for the G7 countries plus the euro area. According to our results, global liquidity shocks are a driving force of the global economy and various national economies. However, some other shocks such as originating from house prices, GDP, technology and long-term interest rates play a role at the global level as well. These results prove to be robust across different specifications. Structural break tests indicate that global liquidity shocks have recently become more important as a determinant for house prices. In general, global variables have become more powerful over time in driving national variables. Terms of use: Documents inJEL Classification: C22, E31, E32, F42

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Liquidity and the Dynamic Pattern of Price Adjustment: A Global View

Cited by 2 publications

References 19 publications

Factors Influencing Foreign Direct Investment Flows into Turkey

Factors Influencing Foreign Direct Investment Flows into Turkey

The Importance of Global Shocks for National Policy Makers - Rising Challenges for Central Banks

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