ÇÜ - SBE

İKTİSAT ANABİLİM DALI

İKTİSAT DOKTORA PROĞRAMI .
FİNANSAL PİYASALAR VE KURUMLAR DERSI
FİNAL SINAVI SORULARı (OCAK 2019)

Ayat Esaa -201693311

Question (1)

The first system of Bretton-Woods that emerged in 1944 was different from that which had been
intended . Instead of a system of equal currencies, the U.S. dollar was the center of the system.
The U.S. Treasury, which entered the Bretton-Woods period holding three-fourths of the global
monetary gold stock , pegged the price of the dollar per ounce of gold, freely buying and selling
gold to official bodies at that price. Others intervened to keep their currencies within one percent
of parity against the dollar by buying and selling dollars .

In 1949 a group of 24 countries devalued their currencies against the dollar, however, exchange
rate adjustments among the major currencies became less-frequent over time for the several
reasons such as Speculation , Expenditure reduction and Terms-of-trade effects . The years 1959
to 1967 are considered as the heyday of the Bretton-Woods I system ,as the year 1959 marked
the return to convertibility of European currencies. In addition, that year seemed to mark the
turning point from a global dollar shortage to a global dollar glut. Till 1958 less than ten per cent
of cumulative U.S. balance-of-payments deficits since the end of World War II had been
financed through U.S. gold sales as European governments were keen on accumulating dollar
reserves.

The key characteristic of the system In 1960s was that the United States played the role of world
banker specifically engaging in maturity transformation , providing short-term liquidity services
and supplying fixed direct investment to the rest of the world . The Bretton-Woods I system
continued to operate until early 1973, but the years 1969 through 1973 were marked by a huge
and unsustainable expansion in U.S. dollar denominated global liquidity, several foreign-
exchange crises, and ad hoc arrangements aimed at sustaining the system.

The identification of 1967 as the end year of the heyday of the Bretton Woods I regime reflects
two important events that took place the following year. First, a run on sterling and the dollar
into gold brought a collapse of the gold-pool agreement in March 1968. Created in 1961 by eight
major countries (Belgium, France, Germany, Italy, the Netherlands, Switzerland, the United
Kingdom, and the United States) to stabilize the U.S. dollar price of on the London, the gold
pool became a key pillar of the Bretton-Woods I regime. With the abandonment of the gold pool,
the price of gold for official transactions remained at $35 per ounce but the members of the gold
pool did not attempt to control the price of gold in private transactions; in order to prevent
arbitrage, central banks agreed not to sell in the gold market.

Second, in 1968 the Federal Reserve removed the 25-per-cent gold backing requirement against
the issuance of Federal Reserve notes. It has been argued that the key effect of these
arrangements was that gold was demonetized at the margin. In effect, the world switched to a de
facto dollar standard. Additionally, the Federal Reserve’s removal of the gold-backing of the
notes completed a transition, encompassing several decades, to a pure fiat domestic money
standard.

For the new or present Bretton-Woods (II) , Two factors form the main background of the
system . First, during the period 2002 to 2007 a large accumulation of global reserves took place
Moreover, reserve accumulation during the latter period was underpinned mainly by Asian
emerging market economies. Underlying the reserve accumulation were the following drivers:
(1) export-led growth strategies, especially on the part of Asian emerging market economies,
supported by undervalued exchange rates and controls on capital flows. (2) an excess of
domestic savings over domestic investment in many Asian emerging market economies,
combined with underdeveloped domestic financial systems in those economies and (3) unilateral
self-insurance in the aftermath of the series of exchange rate crises, especially the Asian crisis of
1997-98 that struck emerging market economies in the mid and late-1990s.

Second, the large accumulation of reserves was used to finance growing U.S. current account
deficits. Where the deficits should have become increasingly difficult to finance as the net
international investment position of the United States declined. With investors becoming
increasingly reluctant to invest in U.S.- dollar-denominated financial instruments, yields and
spreads on those instruments would have been expected to rise. In fact, however, nominal yields
and spreads on dollar denominated instruments fell during the period 1999 through the mid-
2000s .

It had been argued that after the collapse of Bretton-Woods I, the structure of the international
monetary system came “full circle to its essential Bretton-Woods era form”, allowing the U.S.
current account deficits to be financed while both nominal interest rates and interest-rate spreads
on U.S. financial instruments fell , they also argued that the present system, despite its large
global imbalances, will also be sustainable. DFG (2005) stated that the current regime would last
for another 10 years (from the mid-2000s). They also put forward the view that, at some point in
the future, the regime will metamorphosise into a Bretton-Woods III regime as a new group of
countries graduate to the periphery. Caballero, Farhi and Gourinchas (2008) also stressed the
sustainability of the mid-2000s’ regime.

the current regime constitutes a revived Bretton-Woods regime, it is vulnerable to the same set of
destabilizing forces ,including asset-price bubbles and global financial crises that led to the
breakdown of the earlier regime .
References
Hall and Tavlas (2010) ,”Bretton-Woods systems ,Old and New and the rotation of exchange rate regimes” ,
working paper , Bank of Greece .
Edwin M. Truman (2017),”The End of the Bretton Woods International Monetary System” , Peterson Institute for
International Economics.
Sabine Dammasch (2006),”The System of Bretton Woods;A lesson from history” .

Question (2)

During the postwar era, financial markets in industrialized economies were profoundly regulated.
Beginning in the 1970s, these regulations and restrictions began to be disassemble and by the late
1990s all of them had been eliminated .

This deregulation process was generally gradual and spanned several years, but two countries
chose to deregulate their financial markets much more swiftly and comprehensively than others:
the UK in 1986 and Japan during the 1997 . These two deregulation episodes were branded as
Big Bangs, as they differed both in the level and speed of regulatory change and were
distinguished by the explicit political ambition of creating world centers of financial activity .

The Big Bang in UK has been regarded as one of the crowning achievements of the Conservative
government led by Mrs Thatcher, providing the foundation for the City of London’s reemergence
as the leading international financial center. The term ‘Big Bang’ refers specifically to a single
event that took place in 1986. On that day the London Stock Exchange switched from floor-
based trading, where brokers and dealers met to buy and sell, to a screen-based system linking a
network of market makers located in separate bank offices. The notion of a Big Bang emerged
following the passage of two pieces of legislation; the Financial Services Act and the Building
Societies Act in 1986 .
Reflecting the importance of Big Bang , some authors argued that it was the abolition of
exchange controls and the general international trends that were actually more important in terms
of forcing the changes . This suggests that, with the benefit of hindsight, Big Bang was not that
significant compared to the longer-term trends that were forcing the pace and direction of
change, especially technological developments and the process of globalization .
The development of modern securities markets around the world continues to be attributed to Big
Bang .It is also noted that the 19980s was the only peacetime decade during which the
productivity of British financial services grew more rapidly than that of the economy as a whole,
despite the weak performance in manufacturing during the 1960s and 1970s, and this could be
attributed to the consequences of Big Bang because of the increased competition it generated .

For those reasons many remain convinced that Big Bang was important and search for its causes.
From one perspective Big Bang was an ideological revolution engineered by the Conservative
government of Mrs Thatcher in the 1980s with the deliberate aim of restoring the City of London
to its position as the leading international financial center . One perspective suggest that financial
deregulation and reform was promoted as part of the broader “Thatcherite revolution”’ . The
other perspective is to see those same politicians as being manipulated by powerful City interests
seeking to establish the primacy of finance over manufacturing industry .

One of negative consequences of Bing Ban ,including the destruction of major industries and the
creation of areas of high unemployment and social deprivation. Also there was no ambiguity
associated with Big Bang unlike other policies which involved an inevitable compromise
between state intervention and market liberalization that pleased neither set of proponents.

The impact of the Big Bang on the performance of UK financial markets is considered to have
been large. In their assessment of the microstructure reforms regarding commission fees,
electronic trading and the organizational integration of brokering and jobbing, Tanndaly and
Daniel (2017) argued that the impact of market efficiency was immense. Following the abolition
of fixed commission fees, rates on execution share trades declined from approximately 0.5 per
cent to 0.25 per cent of the transaction value. In the first months after the reform, the number of
active firms increased, and daily stock market turnover nearly doubled .

References
C. Bellringer and R. Michie (2014) , “Big Bang in the City of London: an intentional revolution or an
accident?” , Financial History Review , 111-137 .
J. Tanndal and Waldenstrom (2017) ,”Does Financial Deregulation Boost Top Incomes? Evidence from
the Big Bang” , Department of Economics, Brown University .
Kirkland, C. (2015) ,”Thatcherism and the origins of the 2007 crisis”, British Politics, 10 (4), 514-535.
Question (3)

In the financial instability hypothesis , Minsky argued that the true essence of capitalism is its
tendency to expand, accompanied by an endogenous fragility and financial crises. A long period
of economic tranquility in which firms’ expectations are confirmed entails a generalized
euphoria amongst economic units: indebtedness rises continuously since firms and banks are
fully confident that loans will be repaid without difficulties. Accordingly, debt ratios increase to
the point where they threaten the viability of fragile economic units.

The previous process comes to an end when some firms fail to meet their financial commitments
(because of over-optimistic expectations) or banks sharply revise their lending policies, usually
by raising interest rates. This generates a fall in investment and a collapse of aggregate profits. A
risk of deflation arises when financial difficulties lead various firms to sell off their financial and
physical assets to pay back debt. Without any external intervention, the conditions are ripe for
turning a recession into a severe depression .

Minsky first based his financial instability hypothesis on the microeconomic analysis of a
representative firm. Whilst this assertion is accepted by a majority of heterodox economists, a
studies like Charles (2016) state it should be revised slightly because the representative firm is
one argument he used but it was by no means the only one. Elsewhere, he develops his instability
hypothesis based on a fully macroeconomic approach without any reference to the stylised single
firm model . Minsky’s critics maintain that his financial instability hypothesis, based on his
theory of investment, suffers from a lack of internal coherence when analyzed in macroeconomic
terms.

Lahart (2007) says a Minsky moment occurs when over-indebted investors are forced to sell
even their solid investments .Magnus (2007) believes it occurs when lenders become
increasingly cautious’ Whalen (2008) identifies it with a ‘credit crunch’ and Davidson views it as
‘when the Ponzi pyramid financial scheme collapses’.

In context of explaining the subprime crisis of 2008 , considerable studies examine the validity
of (FIH) as main source of crisis . Paul Davidson (2008) shows that the financial market
instability in 2008 is not a Minsky moment. Davidson claimed that the recent financial market
instability is due to an insolvency problem of large underwriters caused by their attempt to
“securitize” (make liquid) noncommercial mortgages (where the latter are normally illiquid
assets). And the study suggest that the solution for insolvency problem is large direct infusions of
new capital in these institutions or removing nonperforming loans from their books. An easy
money policy per se will not do.

Timur Behlul (2011) argued that the ability of the financial instability hypothesis (FIH) to
explain financial crisis of 2008 crisis is absent , considering that Minsky moment as un a
cumulative process toward financial instability , he argue that in the decade leading up to the
crisis, financial behavior at the firm level did not show a gradual and progressive deterioration
toward instability which is an essential requirement for a Minsky moment.

While Sandoval (2017) empirically examined the financial instability hypothesis FIH in United
States in this study the stability measured by low implied volatility, VIX , there is an increase in
the real risk observed by the other variables, using SRISK index to measure the systemic risk of
financial institutions .He found a statistical support to the Minsky hypothesis, during long
periods of stability there is an increase in risks. The thesis demonstrates the inverse relationship
that exists between the variable that measures the implicit market risk VIX and the variables that
measure facts that are not biased by the investor's thinking such as the Market to Book and the
CAPE. Periods in which implied volatility is at low levels lead to very optimistic asset
valuations.

Moreover, Roger(2010) study provides direct empirical support for the FIH. He uses a large
2002-2009 quarterly data set of all publicly traded North American firms and foreign firms
traded on North American exchanges, a total of 8,707 companies. Financial ratios are used to
classify these firms in each quarter according to Minsky's FIH categories (hedge, speculative,
Ponzi finance units). Market value is used to weight the categories and average betas are
computed as measures of volatility.

Kaboub and Fernandez (2010) identified that inequality has been the main structural cause of the
subprime crisis. The study shows that Fixing the financial crisis through bailouts of any sort
would at best restore temporary financial stability, but it does not address the root cause of the
problem. Finally they suggest that solution will be through a job guarantee program that ensures
that homeowners have access to a decent employment opportunity with a living wage and
benefits. Which would help homeowners keep their homes and provide stability to real estate
values, thus indirectly stabilizing the MBS market and financial markets in general.

References
Paul Davidson (2008) ,”Is the current financial distress caused by the subprime mortgage crisis a
Minsky moment? or is it the result of attempting to securitize illiquid noncommercial mortgage
loans?”, Journal of Post Keynesian Economics, 669-676 .
Sébastien Charles (2016) ,”Is Minsky’s financial instability hypothesis valid?”, Cambridge
Journal of Economics ,427–436 .
Behlul, T. (2011),”Was it really a minsky moment? “, Journal of Post Keynesian Economics ,
137–158.
F.Kaboub, Z. , L, Fernandez (2010) ,Inequality-Led Financial Instability: A Minskian Structural
Analysis of the Subprime Crisis , International Journal of Political Economy, 3-27.
Question (4)

The theoretical framework basis of the financial liberalization policies is provided by the
financial repression analysis of McKinnon (1973) and Shaw (1973) , they suggest that
developing countries should liberalize the financial markets via economic reforms so as to
eliminate the vicious circle of low interest rate and growth rates. Also that through interest rate
deregulation, real interest rate will increase willingness to hold financial assets. Thus price
reforms, in theory are expected to change the composition of domestic savings in favor of
financial assets. Funds collected through these assets then will be allocated through financial
markets to the real sector. This intermediation process will bring market discipline to the
corporate sector and improve the quality of its investments. This will provide a positive impetus
to the growth process.

Turkey has experienced relatively modest fiscal deficits during the 1980s, as compared to the
experience of many developing nations. However, two additional factors increased the gravity
of the problem, hindering the potential gains of liberalization attempts: One was the realization
by the fiscal authorities that continued seignorage extraction through monetization was no
longer feasible; that is, the Treasury had almost fully exploited the Laffer curve. Thus, the
deficit had to be increasingly financed by domestic sources through semiadministrative
government bond issues. Secondly, the economy was already experiencing severe inflationary
shocks due to the high foreign debt servicing requirements and rapid currency depreciation.
These factors combined led to excessively high real interest rates, crowded out private investors,
and caused significant strain on the domestic financial markets.

Turkey’s attempts towards liberalizing its financial system have begun along with the structural
adjustment reform program initiated in 1980. Prior to that, the system revealed all attributes of
"financial repression" with negative real interest rates, high tax burden on financial earnings, and
high liquidity and reserve requirement ratios. Overall, the financial markets have suffered from a
highly regulated and inefficient banking system, with consequent low-quality portfolio
management. Given the underdeveloped and fragmented nature of the capital and stock exchange
markets, corporations had to excessively rely on banking credits rather than issuing stocks for
financing their working capital balances (OECD, 1988). The fiscal deficits were mostly financed
by direct monetization through the Central Bank .

Liberalization of the Turkish economy started in the early 1980s with economic policies
designed to encourage exports. This was followed by the liberalization of the foreign exchange
regime early in 1984, allowing commercial banks to accept foreign currency deposits. In parallel
to those changes, an interbank money market for short term borrowing facilities was enacted in
1986 and the Turkish Central Bankstarted its open market operations in 1987. Additionally, the
Turkish Capital Market Board was established which later on initiated the opening of Istanbul
Stock Exchange during the same period. Finally, with the recognition of full convertibility of the
Turkish Lira and full liberalization of the capital account, financial liberalization was effectively
completed in 1989.

References
G. DİNAR, D., P. İyidoğan (2015) ,” financial liberalization and economic growth in turkey: a
reexamination” , Journal of Economics and Administrative Sciences,19-43 .
Tulay Arin(1999) , “Financial Markets and Globalization in Turkey” , Topics in Middle Eastern and
African Economies .
BULENT AYBAR ,”Financial Liberalization, Financial Deepening and Efficiency Implications in the
Emerging Markets: Preliminary Evidence from Turkey” .

Question (5)

Number of studies state that the crisis occurred in 1994 mostly result from domestic
macroeconomic imbalances and banking sector weaknesses that are exacerbated by volatile
capital inflows and outflows ,while the financial crises through 2000s are mostly related to
external economic and financial problems. The Turkish economy entered in a long period of
financial turbulences from the beginning of the 1990s to 2002 , that can be observed through the
occurrence of financial crises accelerated following the financial liberalization process due to a
combination of domestic imbalances and external shocks .

Adopting a radical structural adjustment program in 1980 followed by large structural reform
programs obtained an initial success followed by bankruptcies of several unregulated brokerage
firms in 1982, and then by the occurrence of severe financial crises in 1994, 1998-99, 2000-01,
and 2008-09. These crises led to severe economic consequences in terms of increasing interest
rates, large reserves losses, high currency depreciations, large capital outflows, collapse of the
BIST index, excessive output losses, and failure and/or nationalization of more than twenty
domestic banks .

The main underlying reason behind the crisis of 1994 was the uncontrollably growing domestic
debt stock. The deterioration of the fundamentals prior to the crisis did not bother the policy
makers or the profit making banking sector too much, under conditions of easy access to capital
markets. The perils of fast capital account liberalization without any fiscal adjustment had
become apparent in earlier stages of Turkey’s financial liberalization. In addition to that
pressures in the exchange market sharply increased and culminated to crisis. First, in the second
half of 1993, to prevent a further rise in the cost of servicing the domestic debt, the government
cancelled various domestic debt auctions or accepted a small percentage of short maturity offers.
Second, it relied heavily upon the Central Bank resources. These shocks triggered a run for
foreign currency.
The main source of the contested fragility of the Turkish financial sector and thus the currency
can be traced back to the 1989 decision to eliminate all the regulations on the capital account.
This decision has liberalized all external financial transactions of the Turkish economy vis-à-vis
the rest of the world and led the domestic asset markets to be totally dependent on the short term,
speculative movements of foreign capital flows. Consequently, finance had been alleviated over
industry and the real sphere of the economy, and the financial sector drifted to the speculation of
the short term capital flows in a process which had been characterized as casino capitalism.

During the course of 2000 the targets for the nominal exchange rate, net domestic assets and
primary deficits were all attained, but prices proved to be stickier than expected, resulting in a
significant appreciation of the currency in real terms. The CPI inflation on a year-to-year basis
started to fall steadily from 2000, but the pace was slow and the end-year target was overshot by
some 15 percentage points. A number of factors contributed to price inertia. First, the large
increase in international energy prices added to domestic costs and inflation. Second, a tradeoff
emerged between fiscal adjustment and inflation since reducing losses of state-owned enterprises
required increases in their prices. Third, wage increases in the public sector often exceeded the
inflation target as a result of implementation of collective agreements reached in previous years
while in the private sector wage settlements continued to be based on backward indexation.
Finally, certain components of CPI, notably rents rose much faster than the inflation target.

Since the global financial crisis of 2008-2009 Turkish banks and large firms borrowed heavily
from foreign investors, typically in U.S. dollars. Easy access to foreign financing supported
Turkey’s large annual current account deficits (a broad measure of the trade balance), Turkey’s
reliance on external financing made it vulnerable to changes in the terms and availability of
credit. Turkey’s financing costs increased as the U.S. Federal Reserve (Fed) started increasing
interest rates. Additionally, investor perceptions of Turkey’s creditworthiness started changing.
Investors started questioning the sustainability of Turkey’s construction boom and expansionary
fiscal and monetary policies .

Increased political tensions between Turkey and the United States also eroded investor
confidence. In August 2018, the Trump Administration levied sanctions on two Turkish cabinet
ministers deemed responsible for detaining and prosecuting an American pastor whose full
release President Trump has demanded. As investors became more reluctant to invest in Turkey,
demand for the lira started to fall and the currency depreciated. Then the nominal value of
Turkey’s debt (the value of the debt in lira) rose, exacerbating investor concerns about debt
sustainability in Turkey, making investors even more reluctant to invest and further pushing
down the value of the lira, creating a vicious cycle.

On August 10, 2018, President Trump alluded to concerns about the lira’s depreciation when he
announced a doubling of the steel and aluminum tariffs on Turkish imports invoked under
Section 232 for national security concerns. Rapid depreciation of the lira generally makes it
harder for U.S. products to compete with Turkish products, although U.S.-Turkish trade flows
overall are low. Almost immediately after the President’s tweet, the lira markedly dropped even
further.

References
Fatih Özatay (2000) ,”The 1994 currency crisis in Turkey”, The Journal of Policy Reform, 327-352.
A. Arıa and R. Cergibozan (2014) ,“The Recent History of Financial Crises in Turkey “, Journal of
Engineering Technology and Applied Sciences
Oya Celasun ,”The 1994 Currency Crisis in Turkey”, Macroeconomics and Growth Group
Development Research Department , The World Bank .
Y. Akyuz and K. Boratav (2003),”The Making of the Turkish Financial Crisis” , World Development,
1549–1566 .
Rebecca M. Nelson (2018) , “Turkey’s Currency Crisis” , congressional research service .

Question (6)

The impossible trinity hypothesis considers a fundamental contribution of the Mundell–Fleming

framework which also called the “trilemma,” it states that a country may simultaneously choose
any two but not all of the those three goals : monetary independence, exchange rate stability and
financial integration. Each of the three sides of this triangle can represent the full extent of
monetary independence, exchange rate stability, and financial integration, yet it is not possible to
be simultaneously on all three sides of the triangle . Most economies generally prefer monetary
independence in order to control the supply of money and domestic interest rates. From the
impossible trinity, an open economy can regain monetary independence by giving up financial
integration and opting for exchange rate stability and monetary sovereignty combination .

The trilemma implies that policy makers face a tradeoff; increasing one trilemma variable would
induce a drop in the weighted average of the other two. However, the validity of this tradeoff
among the three trilemma variables has not been empirically tested properly, possibly because
the trilemma hypothesis does not impose an exact functional relationship between the three
policy variables, and because it is simply quite difficult to create systematic metrics that measure
the extent of achievement in the three policy goals.

There are studies argued that testing properly the trilemma paradigm remains a challenge While
by now some view the trilemma as truism, most countries are not at the vertices of the trilemma
and the framework does not impose an exact functional restriction on the association between the
three trilemma policy variables with respect to configurations outside the three trilemma vertices.
Also measuring the degree of financial integration, exchange rate flexibility and monetary
independence remains a challenge. Capital mobility has often been difficult to operationalize and
to measure in practice.
The partial attainment of all three policy goals has seemed to characterize policy making in
practice and has perhaps even been the dominant global policy stance, especially for emerging
market economies. This mixed approach to the trilemma has been characterized by continual
adjustment of policies in response to a rapidly changing global environment, as well as attempts
to implement market oriented economic reforms. At the same time, government policy makers
have not always had clear guidance on how precisely to manage the trade-offs: in terms of what
is the optimal position in the triangle at any given time? Or even more fundamentally what are
the joint implications of a complex set.

For Turkey case, Cortuk and Singh (2011) investigate the macroeconomic policies of the last
two decades in the context of trilemma trade-offs , empirical analysis indicate that trilemma
trade-offs are binding for Turkey in most cases and Turkish macroeconomic policies have been
in a transformation with respect to trilemma trade-offs in particular from 1998Q1-2001Q1 to
2001Q2-2010Q4. The most remarkable change is the decrease of exchange rate stability
contribution although it dominates others in the trilemma configuration throughout the entire
period. Naturally, this reduction on exchange rate stability was accompanied by increases in
other two indices, namely monetary policy independence and capital openness.

References
J. Aizenman, M., Hiro Ito (2013),The “Impossible Trinity” Hypothesis in an Era of Global Imbalances:
Measurement and Testing , Review of International Economics, 21(3), 447–458 .
Mpho Bosupeng (2015) ,”The Impossible Trinity and Financial Markets : An Examination of Inflation
Volatility Spillovers” , MPRA Paper No. 77923 .
Orcan Cortuk and Nirvikar Singh(2011) ,”Turkey's trilemma trade-offs” , MPRA Paper No. 35623.
Question (7)

The Istanbul Financial Center project (IFCP) is a state approved and run project since 2009 that
Aims to turn Istanbul into first a regional and then global financial center. Currently, the IFCP
involves ongoing building work in Istanbul’s Atasehir district. Several state owned Financial
organizations and regulatory institutions plan to move their Ankara--‐based headquarters to the
IFCP campus.

The project is based on the idea that Istanbul, as the biggest business city in Turkey can be a
global financial center in addition to the established ones for the world. Therefore, a lot of
strategies have developed and outlined in the official project document. There are a lot of factors
to be considered for being a financial center. Considering all factors, a country may and should
implement a lot of projects and plans to succeed. In addition to classified factors as in the figure
1, there is another factor that might be significant for the success on the way of being a financial
center.

Sancak (2016) attempts to test the assumption that being a capital city is a significant and major
factor for a financial center , in terms of Ankara-Istanbul paradox by examining the rule of law
,which is a system where the following four universal principles are upheld . First the
government and its officials and agents as well as individuals and private entities are accountable

under the law. Second the laws are clear, publicized, stable, and just are applied evenly and
protect fundamental rights, including the security of persons and property. Third the process by
which the laws are enacted, administered and enforced is accessible, fair and efficient. Forth
Justice is delivered timely by competent, ethical, and independent representatives and neutrals
who are of sufficient number have adequate resources and reflect the makeup of the communities
they serve.

Turkey’s recent ranking is 80 for the year of 2015 (WJP, WJP Rule of Law Index, 2015). The
ranking for Turkey was 59 for the previous year (WJP, WJP Rule of Law Index, 2014).
Similarly, Turkey’s current financial center ranking (47) is lower than previous year’s one (42).

The article concluded that having financial center located at a different place than a capital city is
not a problem or an obstacle per se.However, this is a serious obstacle for countries that have
low profile in rule of law standards and the different perspectives between Ankara and Istanbul
are serious obstacle for the success of the Istanbul Financial Center Project. Moreover ,Turkey
should score a better place in Rule of Law Index Rankings to have a competitive financial center.
Because It is impossible to have a financial center globally without a good ranking and a positive
impression.

Reference
Ibrahim Ethem sancak (2016),” Ankara-Istanbul Paradox of the Istanbul Financial Center Project
“,Procedia Economics and Finance , 185 – 194 .
Question (8)

In the 1990s a lot of countries reformed their central bank laws, removing monetary policy from
the hands of the government. This means that the newly independent central banks can change
interest rates, target the exchange rate or the money supply to ensure price stability or low
inflation without regard to incumbent approval ratings. Because central bank independence
(CBI) has been designed as an institutional mechanism for keeping a check on inflation, most
Studies on (CBI) focus on the effect of such independence on inflation and its potential trade-off
with economic growth .
Independent central banks prefer budget discipline because of the long run connection between
deficits and inflation and can pursue their fiscal policy preference through interest rate hikes and
refusal to lend to the government. CBI is, however, generally granted via regular legislation and
there are risks to bank independence that come from implicit or explicit threats to amend the law.
In this context , Bodea and Higashijima (2012) argued that legal central bank independence (CBI)
deters fiscal deficits predominantly in countries with rule of law and impartial contract
enforcement, a free press and constraints on executive power .The estimation results using data
from 78 countries (1970-2007) show robust and strongly support to the suggestion that CBI
reduces fiscal deficits in democracies and countries with rule of law, high constraints on the
executive and a free press. Reforming a country’s central bank and granting it more legal
independence has been a clear trend in the past two decades.
On examining the assumption that it central bank independence (CBI) ensures price stability,
Bodea and Hicks (2015) attempt to examine whether CBI has a greater effect on price stability
when a country has institutional mechanisms that limit political interference in central banks’
activities .Also that CBI in democracies should be directly reflected in lower money supply
growth. Besides being more disciplinarian, it also ensures a more robust money demand by
reducing inflation expectations and therefore inflation . The empirical results display strong
support for this argument. It shows that the effect of CBI on inflation expectations is unlikely to
hold in nondemocratic countries.
The reform that granted legal independence to the Turkish Central Bank (TCMB) in 2001 was an
institutional turning point within the state structure in Turkey this policy shift prohibited
TCMB’s granting of credits to the Treasury and other public institutions. Institutionalization of
an anti-inflationary approach to macro-economic policy altered the power balance not only
between different state agencies but also between social groups in favour of financial interests
that benefited from monetary stabilization.
B. Sahin (2012) examined the TCMB’s gaining of independence as a function of market-oriented
social forces engendered by changes in broader historical structures such as increasing mobility
of capital across borders coupled with the rise of anti-inflationary ideas. By tracing the
reconfiguration of domestic social forces within a broader historical structure, the article has
investigated how those fractions embedded in global production and finance networks have
driven the macro-economic transformation process and expanded neo-liberal market rules and
practices in Turkey. By investigating why particular social forces asked for and promoted the
adoption of central bank independence .
It argued that the greater integration of the Turkish economy within global markets since the
1980s has served the interests of outward-oriented industrial and financial capital in particular
and thus has given rise to internationally oriented social forces in Turkey. Gaining credibility via
domestic and foreign investors was particularly important in Turkey, which often experienced
economic fluctuations. Domestic capital therefore promoted the idea of central bank
independence to ensure the credibility and predictability of the Turkish economy.

Anti-inflationary ideas that legitimate the discourse and action of market-oriented social forces
were important in Turkey’s delegation of monetary policy to an independent central bank in
2001 with law no. 4651. The law prohibits the TCMB from providing loans to the government to
finance budgetary deficits and from introducing inflationary monetary policies. This shift in the
position and functioning of the TCMB represents a basic change in the power relations between
different state agencies. The TCMB’s gaining autonomy refers to the reconfiguration or
reorganization of the Turkish state along more technocratic lines that benefit holders of
internationally mobile capital.

References
Cristina Bodea and Masaaki Higashijima(2012) ,”Central Bank Independence and Fiscal Policy:
Incentives to Spend and Constraints on the Executive” , British Journal of Political Science .
Cristina Bodea and Raymond Hicks (2015), Price Stability and Central Bank Independence: Discipline,
Credibility and Democratic Institutions “,International Organization, 69, 35-61 .
Sevgi B. Şahin (2012),”Central bank independence in Turkey: A neo-Gramscian analysis”, Cooperation
and Conflict , 47(1) ,106–123 .

Question (9)

In his book “Manias, Panics and crashes : A history of financial crises”, Kindleberger attempts to
analyze the sudden changes in the prices of securities and real estate and the subsequent crashes
based on historical accounts . He grouped the stages of the financial cycle as first the increases in
the prices of real estate and securities, then their observations when prices peaked, and then in
the debacle as prices crashed. His approach followed Hyman Minsky’s emphasis that changes in
the supplies of credit were pro-cyclical, increases in the supply prolonged the expansion in the
boom and decreases intensified the subsequent crash. Minsky viewed banking crises in a
domestic context while Kindleberger extended the per spective to an international context.

The fundamental results can be state as Kindleberger argument that the role of the International
Monetary Fund as an international lender of last resort in providing global monetary stability has
been inefficient and the fund become the agent of one or two large countries to enable them to
delay the decline in the price of their currencies. Also highlighted four waves of banking crises
since the early 1980s , the relationships among the successive waves and the possibility that
these four waves are independent and unrelated seems low. Hence he concluded that there was a
systematic relationship among these four waves beginning in Tokyo to the United states , or at
least between the first and the second, and the second and the third.

This implies that There are many possible linkages among countries, including trade, arbitrage of
securities, capital flows, changes in central bank reserves of gold or other international reserve
assets, and direct contagion of speculators in euphoria or gloom. Causes of similar bubbles
symptoms . Some surges in the supply of credit are national, others global in that two, three or
more countries are involved .

On answering the question What constitutes the difference in the range of crisis ? Kindleberger
state that it depends on the expectations that a rise in interest rates generates. With inelastic
expectations (no fear of crisis or that the price of the currency might decline) an increase in the
discount rate attracts funds from abroad and helps provide the cash needed to enhance liquidity;
with elastic expectations of changes of falling prices, bankruptcies, or the decline in the price of
the currency , raising the discount rate may suggest the need to take more funds out rather than
bring new funds in .

One trigger that leads to financial crisis is a sudden halt to foreign lending, perhaps because of a
domestic boom; thus for example the boom in Germany and Austria in 1873 led to a decline in
money outflows and contributed to the difficulties of Jay Cooke in the United States. Similar
developments occurred with the Baring crisis in 1890, when troubles in Argentina led to a
sudden decline in money flows to South Africa, Australia, the United States, and Latin American
countries. The stock market boom in New York in the late 1920s led Americans to buy fewer of
the new bond issues of Germany and various Latin American countries, which in turn caused
these countries to slide into depression. A halt to foreign trading is likely to precipitate
depression abroad, which may in turn feed back to the country that launched the process.

Reference
R. Z. Aliber and C.P. Kindleberger (2015) “Manias, Panics and crashes : A history of financial
crises”, Palgrave Macmillan.
Question (10)

In the model of unbalanced growth, Baumol divides the economy into two parts: a ‘progressive’
and a ‘non-progressive’ sector suggesting that regular growth in labor productivity can occur
only in the ‘progressive’ sector. For Baumol, regular productivity growth is the result of
technological innovation which manifests itself in new capital goods. Capital goods are also the
source of economies of scale, being another source of productivity growth.
Regular productivity growth is thus defined to depend on certain physico-technological
requirements. In the service industries, Baumol’s model identifies nominal wage growth in
excess of productivity growth as the main determinant of the rise in Health Care Expenditure
(HCE) . He argues that physical capital cannot be employed on a large scale. He cites repeatedly
education and health care as examples for industries that will inevitably remain highly labor-
intensive. Such industries he relegates to the ‘non-progressive’ Baumol does not claim that
increases in labor productivity are impossible in the ‘non-progressive’ sector only that this sector
comprises “activities which by their very nature permit only sporadic increases in productivity”.
Baumol’s analysis reveals a fundamental supply-side factor to be the main driver behind health
expenditure, namely the fact that in the health sector (non-quality adjusted) productivity growth
usually falls short of the growth in wages. It is doubtful that health policy can influence the basic
production techniques in the supply of health care. Also, it is probably not possible to prevent
wages in the health sector from rising at a pace set by the ‘progressive sector’ for long.
Therefore, the main drivers of health expenditure are beyond the reach of health policy .
The rise in the share of health care expenditure in nominal GDP he calls “a trend for which no
man and no group should be blamed, for there is nothing that can be done to stop it” .Baumol,
declares: that efforts to offset these cost increases, while they may succeed temporarily in the
long run are merely palliatives which can have no significant effect on the underlying trends.
This said it is clear that the best solution to the continuous rise in health care expenditure is to
increase productivity in the health sector. The assumption of a zero productivity growth rate in
the ‘non-progressive’ sector is unwarranted. Productivity can be increased in this sector also
either by employing labor-saving capital goods or by an improved organization. If productivity
grows the rise in the share of health care expenditure in nominal GDP slows down. It has to be
stressed, though, that as long as the productivity growth rate in the ‘non-progressive’ sector
remains below the respective rate in the ‘progressive’ sector , the health care cost explosion can
only be protracted but not stopped or even reversed.

References
Jochen Hartwig (2008) ,”What drives health care expenditure? Baumol’s model of ‘unbalanced growth’
revisited , Journal of Health Economics , 603–623.
Okunade, A.., Karakus, and Okeke (2004), “Determinants of health expenditure growth of the OECD
countries: jackknife resampling plan estimates”, Health Care Management Science , 173–183.