Sectoral analysis of policy irrelavence hypothesis; The case of Turkey

03. Summary In macroeconomics theory, a great change has been observed by the development of the Rational expectations theory. Especially, Rational expectations theory which has an important role for New Classical economics has saved its importance and validity up to nowdays. The most important hypothesis argued in this approach is policy irrelavance hypothesis developed by Lucas(1972), Sargent and Wallace(1975), According to this hypothesis, there is no effect of systematic aggregate demand policies on the real variables. Reel effect can only be obtained by unexpected policies. The hypothesis was first tested in 1977 by Barro for the USA. The findings obtained in Barro (1977) have supported the validity of the hypothesis. Although there are many studies which have examined the validity of the hypothesis in literature, there is no definite result on the validity of this hypothesis. This result comes from the fact that existing studies differed from each other in terms of methodology, data, instrument of aggregate demand policy and country. The purpose of this study is to test the irrelevance hypothesis for the Turkish economy and to determine what kind of demand policy can be applied. For this purpose, the validity of the hypothesis was tested for manufacturing sector with nine sub-sectors and for the period of 1950-1996 by using Barro's two step procedure. The findings of the study don't support the validity of the policy irrelavence hypothesis for the case of Turkey. Expected demand policies do have effect on the real varibles such as output, employment and unemployment. VII