Time series analysis of business cycle fluctuations in Turkey

The analysis of business cycle is one of the most important steps for both healthy evaluation of economic developments and construction of accurate economic policies. There have been still debates among different schools of thought about the sources of business cycles and notably the impulse propagation mechanisms, not providing a consensus about the subject. Nowadays, those debates go on between the economists from Keynesian and Classical tradition, namely New Keynesian and Real Business Cycle theories. The focal point of the argument is to distinguish the shocks as a source of business cycle fluctuations. Keynesian theory sees the aggregate demand as the dominant source of changes in output. Real Business Cycle Theory assumes that the fluctuations in the economy are produced mainly due to changes in real factors, particularly shifts in technology, preference or taste, affecting the aggregate supply. By employing structural vector autoregression (SVAR) technique, in this study we try to identify those shocks that impact Turkish economy and to construct the dynamic responses caused by these shocks. The results of the study suggest that the fluctuations in real output is mainly due to supply shocks both in the short and long-runs. Also, domestic supply shocks which are defined as productivity shocks are the most important disturbances in explaining output fluctuations. However, nominal shocks are the dominant factor that affects the price level. External shocks such as world interest rate and terms of trade are found to be the important factors in explaining the fluctuations in real exchange rates and price level. But demand shocks are still the most important determining factor of real exchange rates. Consequently, for a true understanding of the developments in Turkish economy and design of economic policies that enables stable and sustained long-run economic growth; the results of the study have to be evaluated carefully.