An Econometric Approach to the Turkish Economy -A Research in the MundellFleming Model Framework

In economic theory there is some general belief that General Equilibrium model is based on stronger theoretical pillars, whereas Keynesian models are better in empirical predictions especially for the developing countries. The MFM has shaped analytical thinking becoming the basic template during the 1960-70s as an extension of the IS-LM analysis to the open economy. Recent research on the model highly concentrates on the Trilemma Hypothesis which suggests that it is not possible to have all three of the stable exchange rate, monetary independence and financial integration policy choices together. Studies on world economies from 1820 on provide strong evidence supporting the theory. Previously extended form of the MFM has been estimated in Baştav (2006) in seven equations by the Johansen test for 1990-2002. There are goods, money, foreign exchange, labor markets with demand-supply equations as well as wage indexation and price level specifications on the supply side. The model allows for price and wage adjustment and there are altogether four price variables with the interest and the exchange rates. Present study is an update of the model for the years 2003-2021 to test its validity for the new period. Results are quite explanatory for 1990s and 2000s in both studies with particular deviations in behavioral traits and coefficients naturally stemming from differences in policy choice during the two periods in question.