Dynamic Linkages among the Real Economic Activity, Asset Prices and Macroeconomic Policy in Turkey

The purpose of this study is to analyze dynamic linkages among the real economic activity, asset prices, and monetary policy in Turkey. Thus, the effect of stock prices on consumption and interest rate through a time-varying vector autoregressive model is firstly examined for the period of 1987:Q1 and 2013:Q3. Then, the study investigates the relationship between asset prices and fiscal policy shocks for the period of 1988:Q1 and 2014:Q2 through Bayesian vector autoregressive model. Finally, the study employs the generalized autoregressive conditional heteroscedasticity volatility modelling to test the influence of Federal Market Committee minutes on asset prices in BRICS and Turkey for different time periods. As a result of the analyses, the research findings confirm that a positive shock to real stock price positively affects consumption. There are also significant effects regarding the impact of stock prices on interest rate and consumption for the years 1994, 2000, 2007, and 2011 in Turkey. The results obtained from the second method confirm that fiscal policy shocks significantly affect house and stock price indexes. The results of the final model reveal that the influence of FOMC releases is very strong in Brazil, Russia, South Africa and Turkey. There is also a negative return effect in Turkey when there is volatility in both India and China. Lastly, policy recommendations are presented to improve macroeconomic stabilization and eliminate macroeconomic fluctuations for the Turkish economy. Keywords: Macroeconomic policy, TVP-VAR, Bayesian VAR, GARCH Volatility, Turkey