Chapter 9: The role of destabilizing expectations in the 2000–2001 Turkish crisis: a behavioural economics complement to the financial fragility hypothesis
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This chapter explores the possibility of combining behavioural and post-Keynesian economics to analyse the dynamics of financial crises, using the 2000–2001 crisis in Turkey as a case study. Starting from a basic Minskyan structure, the author first shows how rising fragility in the years before the crisis can help account for the economic turbulence that ensued. He then uses behavioural heuristics to devise an agent expectations framework that could be congruent with the evolution of investment and borrowing prior to the crisis and compares it with so-called rational expectations and backward-looking expectations, two common characterizations of agent expectations, to determine which one more closely resembles actual expectation patterns. While backward-looking expectations perform better than rational expectations, the behavioural framework results in a much closer fit. These results suggest that the addition of a behavioural component to a Minskyan framework can complement its narrative of rising fragility before a crisis through a better description of expectations formation processes.

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