Paving the way for an economic crisis with high leverage and currency mismatches:2018-19 crisis in Turkey Working paper/ Fatih Özatay

In the aftermath of the global financial crisis monetary policies in advanced economies caused a surge in cross-border lending to emerging market economies (EMEs). Policymakers of EMEs criticized those policies on the grounds that they pave the way for financial imbalances in EMEs and called for international policy coordination.  Up to mid-2018 leverage of banks and foreign currency exposure of nonfinancial corporates increased sharply in Turkey. Under these conditions, a shock that causes a stop in capital flows can trigger crisis in EMEs. The Turkish economy was hit by several external shocks and entered a recession in the third quarter of 2018. This study aims at analyzing the role of financial vulnerabilities and domestic policies in Turkey’s 2018-19 crisis and draw policy lessons. We argue that, notwithstanding complaints regarding lack of international policy coordination, domestic policy mistakes played an important role in paving the way for the crisis.

You may read working paper from here.