Emerging Markets Finance & Trade / November–December 2012, Vol. 48, Supplement 5, pp. 19–34. © 2013 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com ISSN 1540–496X (print)/ISSN 1558–0938 (online) DOI: 10.2753/REE1540-496X4806S502 Resilience of the Turkish Economy During the Global Financial Crisis of 2008 Mustafa Kılınç, Zübeyir Kılınç, and M. Ibrahim Turhan ABSTRACT: The authors explore the sources of the resilience of the Turkish economy to the global financial crisis of 2008. They first show that financial factors and fundamentals were very strong in Turkey before the crisis, and monetary and fiscal policies responded strongly to the crisis in a countercyclical way. They find that these strong fundamentals and prudent economic policies are reflected in the risk premium movements. Emerging market bond index (EMBI) spreads for Turkey increased slightly during the 2008 crisis and decreased back to the normal levels quickly. This was in large contrast to the crisis in 2001, when spreads increased significantly due to the weak fundamentals and decreased very slowly. Second, the authors quantitatively analyze the effects of risk premium movements during the crisis in a small open economy framework. They find that the risk premium observed in 2008 could not generate large movements in output, validating the point that the Turkish economy was resistant to the financial factors of the crisis. KEY WORDS: crises, EMBI spreads, financial factors, fundamentals, risk premium, Turkey. In the 1990s and early 2000s, Turkey had back-to-back financial and economic crises. Deep and long recessions followed one another, and finally the crisis of 2001 was the low point of the Turkish economy. During all these crises, the financial factors were the usual suspects as the source or amplifier of the crises. The recent global financial crisis of 2008, however, was a turning point in Turkey’s economic development. During this crisis, the Turkish economy stayed very resistant to the economic downturn. Figure 1a shows that the Turkish economy rebounded faster from the 2008 crisis than from the 2001 crisis. Moreover, the recovery of the Turkish economy was stronger than that of most other emerging economies, which is shown in Figure 1b. 1 Although Turkey’s loss in gross domestic product (GDP) was greater than the average loss in other emerging economies in the early stages of the crisis, it bounced back much faster and much more strongly. A natural question here is whether the resilience of the Turkish economy was due to stronger fundamentals in the financial factors of Turkey. This study addresses this question and investigates the explanatory power of the financial fundamentals in the dynamics of the Turkish economy during the crisis. Our main claim is that these fundamentals were very strong in the precrisis period and are therefore not among the usual suspects to be blamed for the recent crisis. Mustafa Kılınç (mustafa.kilinc@tcmb.gov.tr) is an economist at the Central Bank of the Republic of Turkey, Ankara. Zübeyir Kılınç (zubeyir.kilinc@tcmb.gov.tr) is an economist at the Central Bank of the Republic of Turkey, Ankara. M. Ibrahim Turhan (ibrahim.turhan@tcmb.gov.tr) is vice governor of the Central Bank of the Republic of Turkey, Ankara, and is also currently the chief executive officer and chairman of the Borsa Istanbul (Istanbul Stock Exchange). The views expressed in this paper do not necessarily represent those of the Central Bank of the Republic of Turkey or its staff. The authors thank the editor and two anonymous referees for their useful comments, which they found very constructive and helpful in improving the paper.