Macroeconomic instability in Turkey post 1980 era: A dynamic stochastic general equilibrium analysis

In parallel with the developments in macroeconomic modelling, a DSGE model for a small open economy is presented in this study to explain the instability Turkish economy experienced after 1980 whose traces could be seen in 1970s. The purpose of the study is to provide a model based on well-defined micro foundations, applicable to the realities of the economy (considering nominal frictions, market failures, shocks, capital flows) and to prove that the model works with the data observed. A DSGE model was constituted within the scope of recent theoretical approaches in the field and it was tested to see whether it had fitted Turkish economy. Bayesian techniques were applied to estimate DSGE models following the strong econometric views. The effects of impulse-response functions and shocks on economy were then discussed. The findings revealed that each of eight external stochastic shocks caused permanent deviation in production, consumption, inflation, real exchange rates, terms of trade and interest rates. It was found out that all shocks were the reasons of the instability in Turkish economy.