Does Domestic Interest Rate Pull or Foreign Interest Rate Push? An Application Regarding the Determinants of Hot Money: The Case of Turkey

This paper empirically investigates the effects of two pull factors (real interest rate and current account deficit in Turkish economy) in addition to a push factor (US real interest rate) on hot money flows towards Turkey. For this purpose, bound test, ARDL analysis and Toda-Yamamoto causality analysis are performed. Empirical analyses are carried out with quarterly data covering the period from 1992:1 to 2014:4. According to the results of ARDL analysis, the impact of domestic interest rates on hot money flows is positive. Moreover, it is detected that current account deficit and foreign interest rates affect hot money flows negatively. The empirical findings demonstrate that the pushing power of foreign interest rates on capital flows exceeds the pulling power of domestic interest rates on capital flows. Additionally, empirical results indicate that there are bidirectional causality among hot money flows and domestic interest rates; and among hot money flows and current account deficit.