Uncertainty and Monetary Policy: A Svar Analysis for Turkey

Abstract

It is known that periods of high uncertainty in a country have significant effects on economic activities. Therefore, monetary policymakers should consider the degree of uncertainty in the decision-making process. In Turkey, changing the form of government from the parliamentary system to a presidential system in 2018, combined with the global Covid pandemic that started in 2020, caused an extraordinary increase in uncertainty and became one of the main sources of economic problems in the country. This study quantifies the effects of uncertainty on the Turkish economy through an SVAR model estimated with Bayesian techniques. The results show that high uncertainty has a negative and significant effect on economic activities, mainly with the decrease in consumption and investment expenditures. The Central Bank of the Republic of Turkey reacts to these developments with an expansionary monetary policy that injects liquidity into the economy. However, it should not be overlooked that such a policy has limitations due to its long-term negative effects.

Monetary policy and inflation targeting under global uncertainty: a SVAR approach for Tunisia

“…One of the most important findings of this paper is that negative effects on macroeconomic variables are potentially associated with global uncertainty. We align ourselves with the perspectives of Siklar and Siklar (2022) by applying a Bayesian SVAR model for Turkey. Siklar and Siklar (2022) did not focus on the transition to IT under uncertainty because Turkey has already adopted the IT regime in 2006.…”

“…Literature documents mainly the effect of Covid-19 uncertainty shock on monetary policy using variants of VAR modeling in different countries (Baker et al , 2020; Leduc and Liu, 2020; Ozili, 2020; Watanabe, 2020; Pinshi, 2020; Siklar and Siklar, 2022). The common fact is that the coronavirus shock hits the economy hard, plunging it back into recession, and is associated with negative effects on economic activities, namely, a decrease in consumption and investment expenditures, a lower demand, an increase in unemployment and importantly a rise in inflation.…”

“…The common fact is that the coronavirus shock hits the economy hard, plunging it back into recession, and is associated with negative effects on economic activities, namely, a decrease in consumption and investment expenditures, a lower demand, an increase in unemployment and importantly a rise in inflation. Depending on the studied country(ies), central banks are called upon to take urgent actions and develop devices to control inflation and make economic recovery possible, such as lower interest rates in the USA (Leduc and Liu, 2020) or expansionary monetary policy in the case of Turkey (Siklar and Siklar, 2022). In the Tunisian context, only one paper sought the effect of the Covid-19 shock on monetary policy and bank stability (Ben Salem and Slama, 2021).…”

Does Foreign Direct Investment Affect Macroeconomic Dynamics? An S-VAR Approach for Turkey

“…As a result of this structural transformation, the inflation rate dropped to a single digit in 2004 after 30 years. As a result of erasing 6 zeros from the currency unit in 2005 and the atmosphere of trust created, the Central Bank started to implement inflation targeting monetary policy in 2006 (Siklar and Siklar, 2022).…”

The Origins and Dynamics of Inflation in Turkey: An SVAR Approach

“…According to the empirical evidence obtained, more than 80% of the observed variation in production in the short run is explained by demand shocks. It should be noted that there are many studies in which the proposed method was used in the aforementioned study [for an extensive review of the literature on this subject, see Lutkepohl (2017), and for a short review of the recent empirical literature, see Siklar and Siklar (2022)]. In most of the applied studies, various identification constraints and parametric restrictions are used in the covariance matrix of structural shocks.…”