Thursday, 17 March 2011: 16:00
This paper focuses on the impossible trinity of interest rates, exchange rates and capital flows employing data from the emerging financial market of Turkey. Yildirim and Tastan (2009) recently show the significant relationship between capital flows and economic growth in Turkey. Building on their idea, we check the existence of causality for the three variables of interest so that a possible monetary policy prescription could be derived. In this respect, the main theme is to test whether any channel works better than the other in terms of policy making. We use the unconventional methodology of Breitung and Candelon (2006) by checking the possible relationship between the three variables through frequency domain analysis. Our preliminary results show that there is need to rethink on the fundamental findings of previous studies.