Do capital flows improve macroeconomic performance in emerging markets? The Turkish experience

This study examines the effects of capital inflows on the macroeconomic performance in an emerging, small open economy-Turkey. Using monthly data from 1992:01 to 2001:06 and a recursive vector autoregression model, we find that positive innovations in capital inflows appreciate the domestic currency, and increase output and money supply, but decrease interest rates and prices in the short run. We also find that the exchange rate regime does not influence the effects of capital flows on macroeconomic performance. Implications of the findings for policymakers are analyzed.