An empirical analysis of business cycles in Turkey

Turkish economy had many ups and downs in its history. Fırst, Turkey had attempted to adopt a liberal economic model after the establishment of the Republic of Turkey, but Lausanne Treaty constrained the ability of the government to establish an independent economic strategy. While expecting the expiration of restrictions imposed by the Lausanne Treaty, then this time the world's economic crisis started. After the great depression, Turkey has started the planned industrialization economy to minimize the effects of the crisis. After that, the share of industry in national income increased while that of the agricultural sector decreased. In 1950, Democrat Party (DP) came to power and attempted to follow a liberal economic model again. The government tried to transform the economy from etatism to market economy. The agricultural sector was supported and taxes on agriculture were abolished. On the other hand, the government gave importance to scale economies, efforts were made to facilitate the work of the private sector by taking steps in the fields of infrastructure investments, energy and transportation-communication. During the DP period, Turkish economy experienced high growth level until 1953, but due to unhealthy economic structure; increased size of public enterprises, public deficits and inflation, growth started to slow down thereafter. In 1961, planning became a constitutional rule and compulsory for the public sector. This, in somewhat, was the return to etatism, which was a development attempt in a closed economy with the state initiatives. Military government at this period started five-year development plans with import-substitution and high degree of protectionism policies. In 1973, with the oil shock, the current account deficit had been widened and external financing requirements had been increased. The main issue was that planners ignored scale economies and capacity utilization. They created artificial price structures and unrealistic exchange rates. In this period, Turkey had closed, but import oriented economy. Thus, each time, it encountered with balance of payment deficits, currency crises, and unemployment and inflation problems. In order to overcome these problems, on January 24th, 1980 stabilization program was started with the support of the IMF. One of the important goals of this program was to transform the import-substitution economy to export-oriented economic structure. In this regard, one important step was the liberalization of financial market. Thus, the capital account was liberalized in 1989. In later years, economic structure which is governed with political business cycles led increase in the budget deficit and money supply growth, and then high inflation rate. Due to short term opportunistic policies, currency crises and devaluations were never ended in the pre-2001 period. The institutions established to regulate real and financial markets with stability programs have an important place in minimizing distortions. Some of these important institutions are the Capital Markets Board, the Banking Regulation and Supervision Board and the Independent Central Bank. In 2001, with the independence of the Central Bank, governments had been prevented from monetizing economy for populist purposes. Improvements in independent institutions through a strengthening of the legal and regulatory infrastructure have supported the proper functioning Turkish economy. In this study, we employed the business cycle method to analyze aggregate economic activity and to examine whether any structural break take place in the post-2001 crisis, with looking at the volatility changes obtained from the business cycles model. To evaluate pre- and post-2001 crisis period, the data sets on real GDP and its components have been modified, rebased and extended to recent years. The results of business cycle facts show that the structural change took place in the post-2001 crisis period. The econometric model has also been utilized for the indication of structural change. In this regard, Chow stability test have been used. Results of test show that the structural break took place in Turkish economy in the post-2001 period. These indicate that including EU accession, social, political, institutional and structural economic reforms had contributed to structural transformation of the economy in the post-2001 crisis period. In addition, we investigated the business cycles facts of the Turkish economy using quarterly data from 1987:1 to 2016:2 with the methodology used by Kydland and Prescott (1990). We found that both the consumption and investment are procyclical and fluctuates more than output; exports and imports are procyclical; prices and inflation are countercyclical; and M1, M2 and M3 definitions of money give different results with different period of data. On the other hand, employment at the intensive and extensive definition, productivity, manufacturing indices, all are procyclical and consistent with the results of other studies in literature on developing economies.