A Bayesian Estimation of Real Business-Cycle Models for the Turkish Economy

Year 2014, Volume: 3 Issue: 2, 27 - 50, 01.05.2014

Hüseyin Taştan Bekir Aşık

Abstract

We estimate a canonical small open economy real business-cycle model and its several extensions using a Bayesian approach to explore the effects of different structural shocks on macroeconomic fluctuations in Turkey. Alternative models include several theoretical exogenous shocks, such as those to temporary and permanent productivity, world interest rates, preferences, and domestic spending, as driving forces together with financial frictions. Results indicate that output is mostly driven by trend growth shocks, while temporary shocks are relatively less important. Although empirical results generally favor the stochastic trend model, in which there are only transitory and permanent productivity shocks as causative elements, an extended model with random world interest rates and various financial frictions can be a viable alternative to explain economic fluctuations.

Keywords

Real business-cycle models, financial frictions, Turkey, small open economy, emerging economies

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