This dissertation investigates different but related aspects of the impact of global financial liberalization on macroeconomic changes and policy formation in a developing country. By using recent time-series econometric techniques for the Turkish case, three essays in this dissertation test the validity of some of the main arguments in favor of global financial liberalization supported by mainstream economic theory and the Bretton-Woods institutions. Contrary to the arguments that emphasize the positive impact of capital inflows on investment and growth in developing countries, my results suggest that the excessive appreciation of the real exchange rate and its volatility that are often induced by capital flows curbed manufacturing investment in Turkey in the post-capital account liberalization period. The same results also demonstrate that rising financial fragility associated with higher short-term external debt stock in the private sector and overall external debt in the non-financial sector have generated systemic risk, and hence, lowered or postponed the investment decisions of the private sector in the presence of real exchange rate volatility. Other results of my dissertation indicate the limits of monetary policy in dealing with the negative feedback of excessive real exchange rate appreciation and its higher volatility on investment. Since singling out price stability as the main objective of monetary policy in 2002, the Turkish central bank has not responded to the excessive appreciation of the real exchange rate under the inflation targeting regime. Its priority on low inflation rather than a competitive real exchange rate has resulted not only in lower manufacturing investment in the long run, but has also raised the overall risk in the economy by enabling private sector to accumulate external debt in the short run.

<p> Numerous researchers have studied the connection between exchange rate fluctuations and macroeconomic variables for various market economies. Few studies, however, have addressed whether these relationships may differ based on the market classification of the given economy. This study examined the impact on exchange rates for Japan (a proxy for developed economies) and South Korea (a proxy for emerging economies) yielding from the macroeconomic variables of the sticky-price monetary model between February 1, 1989 and February 1, 2015. The results show that money supply and inflation constituted a significant, but small, influence on South Korean exchange rate movements, whereas no macroeconomic variable within the model had a significant impact on Japanese exchange rates fluctuations. The results of the autoregressive error analyses suggest small variances in the affect that macroeconomic variables may have on developed versus emerging market economies. This may provide evidence that firms may use similar forecasting techniques for emerging market currencies as used with developed market currencies.</p>

The emergence of the international debt crisis in the 1980s is typically explained through exogenous shocks to the global economic system, first generating excess liquidity and then creating conditions which render previously attractive lending operations unprofitable. Thus, the international debt crisis is explained as a historical accident, driven by exogenous changes in the global markets. In fact, however, this debt crisis was not a unique occurrence, but rather the last event in a sequence of debt crises. Latin America alone has now experienced a total of five severe crises since the early 19th century. The central argument of this dissertation is that all these crises are characterized by the same structural forces which drive borrowing countries to take on an excess amount of capital, while commercial lenders are driven to engage in excessive lending. On the borrowing side, populist behavior was pervasive during the borrowing binges throughout history. Political leaders made use of the availability of capital from abroad to soothe social dissatisfaction at home and to strengthen their alliances in order to improve their leadership position. In fact, during the 1970s, borrowing volumes almost invariably increased substantially during periods of political instability or at times of elections. In a formal approach, such behavior can only be captured by substituting the political leader as crucial decision-making agent for the standard planner, typically used in economic modeling. A game-theoretic sequential equilibrium model is used to reveal the incentives for the politician to borrow beyond the socially optimal level. On the lending side, commercial creditors can consistently be separated into leaders and followers, be it in the form of investment banks and bondholders or money-center banks and small regional banking houses. Invariably, the leaders derived additional benefits from the lending operations which did not accrue to the followers. It therefore paid for the leaders to expand the lending volume, and required them to convince the followers of the profitability of these loans. A formal model based on informational asymmetries resulting from the segmentation of the banking industry during the 1970s shows the tendency to lend in excess of the social optimum.