An Econometric model of the Turkish economy-a esearch in the framework of monetary sector and the balance of payments

ABSTRACTAN ECONOMETRIC MODEL OF THE TURKISH ECONOMY-ARESEARCH IN THE FRAMEWORK OF MONETARY SECTOR AND THEBALANCE OF PAYMENTSBAŞTAV, F. LeylaOctober, 2005This study aims at specification of the macroeconomic developmentsin a developing world open economy Turkey, following the 1989 liberalizationof the capital movements and conduct of structural analysis of the Turkisheconomy for the period 1990-2002. The economy is investigated on a fourterm basis in the post 1989 period namely, 1990-1993, 1995-1997, 1998-1999 and post 2000. In the first period overvalued currency and high realinterest rate policies were applied to achieve low inflation low externalaccount deficits besides increases in the real wages. Following period easesthese policies with a revert to the real depreciation and lower real income forthe wage earners, to promote exports. In the 1998-1999 period crisis in theworld economies has caused both external and internal demand shrinkagefor Turkish production. The post 2000 period is characterized with economicstabilization policies conducted in cooperation with the international agenciesand the related crisis in the domestic markets.In conducting the structural analysis of the economy for the 1990-2002period two basic reference models are econometrically estimated namely theKeynesian Mundell-Fleming and Monetary Dornbusch models. Monthly timeseries are used in the estimation procedure. Time series are tested on thebasis of unit root by Augmented Dickey Fuller (ADF) test. Following theestimation of the model equations are realized according to the level ofstationarity of the time series. Estimation methods utilized are OLS andJohansenn-Juselius multi-variable cointegration technique.As revealed in the study, during the 1990?s the internal savings couldnot be raised to the level of investments; domestic and foreign marketinstabilities have caused unstable annual rates of economic growth; inflationhas turned into chronic process; internal and external debt stocks havereached remarkable levels; growing trade account deficit has been financedby prominent inflows of invisible items; capital inflows have rised tounprecedented levels, though gaining much volatility in post 1994 period,along with increasing depth in the financial markets.Keynesian Mundell-Fleming model results proved meaningful for the1990-2002 period for Turkey. The goods, money, foreign exchange, labourmarket equations of the model are relevant for explaining the structuralrelations and price formation in the Turkish economy. Real demand, moneydemand, foreign exchange elasticity equations are complying with thetheoretical assumptions. Balance of payments equation reflects high volatilenature of the foreign exchange markets. Labour market equations revealwage indexation in the economy, real supply and price formation in thesupply side. Cointegration equations also reveal the short and long termrelations between the variables in the economy. On the other handmonetarist Dornbusch model equations are far from explaining the structuralrelations and equilibrium mechanism of the economy. The purchasing powerparity, perfect asset substitution assumptions and real demand equatingignoring the public finance factor are not relevant for Turkey. The resultsreveal that structural relations of the economy should be consideredespecially in medium/long term policy formation. The monetary theory basedpolicies advised by international organizations can not be expected toprovide stable sustainable growth in the Turkish economy.