The persistence of the economic shocks within framework in business cycles: Theory and application for Turkey

Business cycles which are a result of the economic shocks can be transitory or permanent. Whether or not the current equilibrium of the economy will return to the long-term trend value depends on business cycle arise from aggregate demand or supply shocks. In this respect, demand shocks cause temporary deviations from deterministic trend at real macroeconomic variables and supply shocks cause permanent deviations from stochastic trend at real variables. The purpose of this study is to investigate the probable effects of the economic shocks on real macroeconomic variables by focusing persistent concept. For this purpose, the effects of the shocks on the economy were explained firstly as theoretical in terms of business cycle theories. Then the concept of the economic persistence was examined statistically. In this respect, the methods for measuring the persistence of the economic shocks have been divided into two groups: The methods for testing whether shocks are persistence and the methods for measuring the degree of persistence. Finally, whether the effects of the economic shocks on real output are transitory or permanent have been investigated for the period of 1987-2012 of Turkish economy by using three different methods. Whether shocks are persistence or not have been determined by employing the cumulative impulse-response functions developed by Campbell and Mankiw (1987a). The economic shocks have been decomposed as transitory and permanent shocks by means of Beveridge-Nelson (1981) decomposition method. Then, the effects of the decomposing each the economic shocks on real output have been tested. In this way, we decided to which shock is more effective on the current equilibrium of the economy. The degree of persistence has been measured by using Cochrane (1988) variance ratio test. Empirical evidences showed that business cycles exhibit temporary deviations from deterministic trend. The method that tested the degree of persistence has supported these evidences. The effects of a shock that results from any cause in Turkish economy continue a period of up to 3-6 months and disappear during that time period.