Sudden Stops and Capital Controls: When to Apply in Turkey

Emerging market countries need capital inflows to finance their current account deficits since their domestic savings are not at desired levels. Foreign direct investment is the appreciated form of capital inflows. However, indirect capital inflows can also boost growth if used in a proper manner. If a country has weak fundamentals and institutional structures or there exists an external shock, speculative foreign capital can easily and rapidly fly away while leaving a financial crisis behind. In this study, we summarize the theoretical background of sudden stops, and then try to identify the sudden stops in Turkey for 1996-2009 period and question the reasons of such disruptions. We particularly focus on periods just before and after the global financial crises. To identify a sudden stop period we use “means” and “volatilities” as well as changes in capital inflows/GDP ratios. Finally, we attempt to find out inflow control mechanisms to minimize the volatility of capital movements.