Financial Stress and Economic Activity Relationship in Turkey: Post-2002 Period

The global financial crisis has hit emerging markets more deeply than advanced economies. this has directed the focus of post-crisis literature to the stress of the financial system. therefore, exploring the methods to measure and monitor the instability of turkey’s financial system will provide early warning signals of possible factors causing financial stress, thereby facilitating the implementation of appropriate policy measures. in this regard, we constructed a financial stress index in this paper. our financial stress index composes of several sub-indexes for measuring the instabilities of different financial markets (such as stock market, foreign exchange market, banking sector, and public sector). the implications of financial stress on turkish economic activity examined empirically. according to our study results, there is a one way direct causal relationship between financial stress and economic activity. the results of impulse response function reveal that random shocks in financial stress have a negative and diminishing impact on economic activity