Hysteresis Effect in Hot Money Flows: The Case of Türkiye

This study examines the existence of hysteresis in hot money flows. The concept of economic hysteresis states that certain financial conditions or shocks may have permanent effects or impacts. In the study, the hot money/M3 ratio obtained by using the hot money calculated by the CBRT 2005 method is preferred as the analysis variable. Structural break tests, which are widely used in the detection of hot money hysteresis, are preferred. In this framework, Ziwot-Andrews unit root test with structural break and smooth transition unit root test with structural break are used for the empirical approach. The empirical findings obtained from both tests prove the existence of a structural break in the hot money/M3 ratio in the Turkish economy. In other words, the structural break, which proves the existence of structural change in the hot money/M3 ratio, which defines the structural status of hot money for the economy, also provides evidence for hysteresis. The break point for the hot money/M3 variable was found to be 2011 for both tests. This finding is consistent with the period when policy interest rates in advanced economies were at minimum levels on a global scale. Low interest rates in advanced economies triggered hot money inflows under interest rate parity conditions and permanently changed the volumetric size of hot money in the Turkish economy.