CREDIT MARKET, NEGATIVE CREDIT SHOCKS AND FINANCIAL MARKETS REACTIONS UNDER HIGH INFLATION CONDITIONS IN TURKEY

Abstract

The effects of high inflation on the stability of financial markets remain a critical and ever-relevant issue. Although numerous studies have been conducted on this topic in the literature, it is difficult to claim that all aspects of the subject have been fully explored. The Turkish economy, which had maintained price stability for many years, has experienced renewed inflationary pressures since 2018. This period, which can be described as a significant regime shift, provides a crucial case study for financial stability literature. In this context, our study analyzes the impact of inflation shocks in the Turkish economy, which has transitioned to a high-inflation regime, on key financial markets, particularly the bank credit market. Using a dataset consisting of quarterly data covering the period from 2003:1 to 2025:1, we conduct analyses based on MS-VAR models. A two-stage analytical approach is adopted. In the first stage, we examine the effects of a potential inflation shock on credit volume, credit rates, and non-performing loans. In the second stage, we investigate how an adverse credit shock affects interest rates, exchange rates, and stock prices in a high-inflation regime. The findings indicate that the economy exhibits a strong tendency to remain in a low-inflation regime. Nevertheless, a strong inflationary dynamic is present in the Turkish economy. Therefore, once the economy enters a high-inflation course, exiting this path may prove difficult. On the other hand, inflation shocks are observed to have strong but short-term effects on the credit market. Negative credit shocks, represented by non-performing loans, have also triggered temporary reactions in other key financial variables such as interest rates, exchange rates, and stock prices. Although unexpected and severe price shocks initially exert negative effects on the credit market and financial markets in general, these effects dissipate within a maximum period of one to one and a half years. This suggests that market participants quickly adapt to high-inflation conditions and continue their financial market activities accordingly.