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Estimating Output Gap for the Turkish Economy

  • Cagri Sarikaya
  • Fethi Ogunc
  • Dilara Ece
  • Hakan Kara
  • Umit Ozlale

This paper presents a time-varying parameter methodology for constructing an estimate of output gap for Turkey. We employ the extended Kalman filter technique in a multivariate setting in which economic content is utilized by the inclusion of inflation and output gap dynamics. As a by-product, we characterize time varying nature of output gap and inflation dynamics. Several results emerge: First, we show that estimating the potential output and output gap in a multivariate setting has several advantages over univariate techniques such as the HP filter. Second, our output gap estimates confirm the historical boom-bust cycles in Turkey and point out that business cycle displays sharp turning points rather than exhibiting a smooth pattern. Third, output gap seems to have contributed dramatically to the disinflation process in 2002-2004. Fourth, estimated time varying parameters suggest that, recently, the relation between real interest rates and the output gap seems to have been converging to a more conventional one. What is more, relative impact of output gap on inflation dynamics has been rising since 2001. Putting aside the “fiscal dominance” argument, these latter findings bode well for the effectiveness of the monetary policy within the prospective inflationtargeting framework.

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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0503.

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Date of creation: 2005
Date of revision:
Handle: RePEc:tcb:wpaper:0503
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  1. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  2. Laurence Boone & Michel Juillard & Doug Laxton & Papa N'Diaye, 2002. "How Well Do Alternative Time-Varying Parameter Models of the NAIRU Help Policymakers Forecast Unemployment and Inflation in the OECD Countries?," Computing in Economics and Finance 2002 359, Society for Computational Economics.
  3. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  4. Clarida, Richard & Galí, Jordi & Gertler, Mark, 2002. "A Simple Framework for International Monetary Policy Analysis," CEPR Discussion Papers 3355, C.E.P.R. Discussion Papers.
  5. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
  6. Hakan Kara & Hande Kucuk Tuger & Umit Ozlale & Burc Tuger & Devrim Yavuz & Eray M. Yucel, 2005. "Exchange Rate Pass-Through in Turkey : Has it Changed and to What Extent?," Working Papers 0504, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  7. Marco Rossi & Daniel Leigh, 2002. "Exchange Rate Pass-Through in Turkey," IMF Working Papers 02/204, International Monetary Fund.
  8. Richard Meese & Kenneth S. Rogoff, 1982. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?," International Finance Discussion Papers 204, Board of Governors of the Federal Reserve System (U.S.).
  9. Bahmani-Oskooee, Mohsen & Kara, Orhan, 2000. "Exchange rate overshooting in Turkey," Economics Letters, Elsevier, vol. 68(1), pages 89-93, July.
  10. Víctor Gómez & Agustín Maravall, 1998. "Seasonal Adjustment and Signal Extraction in Economic Time Series," Banco de Espa�a Working Papers 9809, Banco de Espa�a.
  11. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III: The Core Dynamic and Steady State Model," IMF Occasional Papers 164, International Monetary Fund.
  12. Andreas Billmeier, 2004. "Ghostbusting: Which Output Gap Measure Really Matters?," IMF Working Papers 04/146, International Monetary Fund.
  13. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
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