Abstract
Depending on the international economic integration as a result of the increasing globalization, national economies have become more sensitive to the external economic developments. In such an environment, it is important to understand the concept of international liquidity and its effects. We analyze the effect of global liquidity on Turkish economy in this study. To examine the impact of global liquidation on Turkish economy empirically, Vector Autoregressive (VAR) model and cointegration tests are applied by using the data between 1990Q1-2008Q3 periods. Cointegration results indicate that global liquidation moves together with Turkey‟s national income, inflation rate, treasury benchmark interest rate and real exchange rate in the long run. According to the results of Granger causality test, it is seen that there is causality from global liquidation towards Turkey‟s key macroeconomic variables. The impact-response analysis of the VAR model figures out the increase in global liquidity leads an appreciation in Turkey‟s real exchange rate, decreases national income, inflation and interest rates. The results of the variance decomposition confirms that the longer the period under review, the stronger the effect of global liquidation. Our findings in this study emphasize the importance of global integration and liquidity on Turkish economy which is articulated with the world economy.