Volatility spillovers from capital flows to private domestic investments in Turkey

This paper empirically investigates the volatility interactions between the international capital inflows to Turkey and the private domestic investments. The relationship is estimated with an Extended Constant Conditional Correlation GARCH model. This paper shows the existence of volatility spillovers from the capital inflows to investments in Turkey. Some earlier studies in the literature have already established a positive relationship between the capital inflows and economic growth in Turkey. According to their results, as the mean value of capital inflows to Turkey increases, so does the conditional mean value of Turkish economic growth. This paper’s findings are important as it shows that the private investment channel is one of the channels through which the international capital stimulates growth in Turkey. Hence, it seems that the only way the Turkish economy could continue to exercise high levels of growth depends on stable and sustainable levels of international capital inflows. However, most of the literature on this issue argues that especially international capital inflows are volatile and depend on many factors which are by no means exogenous to countries in question. Thus, Turkey has to find innovative ways to open up new areas for exports so that it would be possible to attain levels of growth that should meet the excessive supply of labor in the market. This alternative means, international capital inflows funding the imports which are used for the production of exports are important but should not be the only source of growth for a dynamic emerging market like Turkey. Hence, there is the ultimate need for helping the private sector to start the production of intermediate inputs used in the production of exports.