The Macroeconomic Effects of Sovereign Risk Premium Shock: A Case Study for Turkey

Abstract

The macroeconomic effects of sovereign risk premium shocks in Turkey are investigated by employing Structural Vector Autoregression Model for the period 2005:12-2017:3. The model includes emerging market bond index plus Turkey (EMBI + TR) as an indicator of sovereign risk premium for Turkey. The empirical results of our analysis indicate that structural shocks in sovereign risk premium affect macroeconomic variables negatively in Turkey. One standard deviation shock in EMBI+TR results in devaluation of Turkish Lira, increase in price level, contraction in credit volume, decline in industrial production index and increase in current account balance. The impact of the negative changes in the sovereign risk premium on the exchange rate and the credit is higher compared to the other variables. It is concluded that results of variance decomposition analysis are consistent with the results of the impulse-response analysis and the impact of structural shocks in sovereign risk premium on credit is higher compared to other variables.

How the macroeconomic conditions and the global risk factors affect sovereign CDS spreads? New Evidence from Turkey

“…According to Longstaff et al (2011:76) Turkey is in a high sovereign CDS spread position because of the macroeconomic instability during the past few years. Several attempts have been made to highlight the drivers of sovereign CDS spreads for Turkey (Kilci, 2017;Gebeşoğlu and Varlık, 2018;Şahin, 2018;Polat, 2017). In a recent study, Cihangir (2020) investigates the global and domestic variables that affect Turkey's sovereign CDS spreads between the 2009 and 2018 periods.…”