Economic fluctuations in Turkey: FAVAR approach

The purpose of this study is to evaluate the economic fluctuations in the Turkish economy during the 2005-2019 period by examining the effects of the monetary policy implemented in Turkey and global markets on macroeconomic indicators. For this purpose, the policy rate, which is one of the most important monetary policy instruments implemented in Turkey, and the policy rate of the United States Central Bank (FED), which directs the global economy; the effects on economic activity, money supply, interest rate, real effective exchange rate, and inflation are examined. To better investigate the effects of monetary policy with a wide range of information, the Factor-Augmented Vector Autoregressive (FAVAR) approach, which combines factor analysis with the standard Vector Autoregressive (VAR) approach, is used to benefit from the information obtained from the large data set. There are very few FAVAR applications in the literature that evaluate economic fluctuations in Turkey by examining the effectiveness of monetary policy; moreover, this thesis uses the most up-to-date and widest data set among them. Using the FAVAR method's advantages in practice, it is purposed to produce better estimations with a large data set than the VAR model applications that dominate the literature. In this thesis, a quarterly frequency data set consisting of 125 variables in total, including the variables of economic activity, money supply, interest rate, exchange rate, and price level, and the sub-items of these variables are used."Interbank overnight interest rate" is used as the policy rate of the Central Bank of the Republic of Turkey (CBRT) and "Effective Federal Funds Rate" is used as the policy rate of the FED. Empirical evidence suggests that the CBRT's tightening policy rate (a positive shock in the policy rate of the CBRT) decreases the industrial production index, the rate of change in money supply (M2), and the real effective exchange rate; On the other hand, a positive shock in policy rate increases the short-term deposit interest rate, the change in long-term deposit interest rate opened in Euro and inflation. However, since the increasing response of inflation is called the "price puzzle", the "Spread" variable, which is suggested in the literature to get rid of the price puzzle, is obtained by subtracting long-term interest rates from short-term interest rates. The Spread variable is defined as the CBRT monetary policy measure, and we find that the price puzzle problem has disappeared after a positive shock in the Spread variable. In addition, empirical evidence shows that FED's tightening policy rate increases industrial production index, short-term deposit interest rate, the change in long-term deposit interest rate opened in Euro, inflation and money supply (M2) change rate, but a positive innovation in FED's policy rate decreases the real effective exchange rate. As a result, it is expected that our findings will shed light on policymakers to understand the economic fluctuations in our country and to implement effective policies.