New Keynesian business cycle theories and its applıcability in Turkey

In this study, we try to test the validity of foresights of New Keynesian business cycle theory for Turkish economy by means of unrestricted VAR model using time series for the period of 1990:01-2008:06. The time series contained in the analysis are: M1 growth rate (GM1), interbank money market rate (I), consumer price index (IR), growth rate of exchange rate (GER), growth rate of Istanbul Stock Exchange Market National 100 Index (GN100), growth rate of Industrial production Index (GIPI), growth rate of gross fixed capital formation (GFC), and growth rate of public sector borrowing requirement (DPBR).Since a Keynesian model is estimated, it will be appropriate to start with a monetary shock. However, for the purpose of comparison, the effect of a fiscal shock is also included into the analysis in this study. For that purpose, we formed six different models and estimated 36 month projections of impulse response and accumulated impulse response functions of that models.According to impulse response functions, a positive shock occurred in GM1 causes to fluctuations in GIPI for 12 months and in GFC for 6 months. In parallel to New Keynesian model?s foresight asserting that monetary shocks are the source of economic fluctuations, we see that GM1 has impact on GIPI and GFC for a short period of time (throughout 6 or 12 months). A positive shock taken place in I leads to fluctuations in GIPI and GFC for 12 months. In parallel to New Keynesian model?s foresight asserting that monetary shocks are the source of economic fluctuations, we observe that I is effective on GIPI and GFC in the short-run (throughout 12 months)According to accumulated impulse response functions, GM1 has positive impact on GIPI and GFC. This situation, once we look at from policy effectiveness perspective instead of theory of economic fluctuations, implies the validity of the foresight that monetary policy of New Keynesyen model in the short-run is effective on real economic activity for Turkey. The accumulated impact of I on GIPI is negligible. I has a positive but a low accumulated impact on GFC.On the other hand, once we examine the impulse response and accumulated impulse response functions for the six models, we observe that real economic activity in Turkey reacts to real shocks much more than monetary shocks.This study makes contribution to the literature by testing the validity of foresights of New Keynesian business cycle theory for Turkish economy.