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The Importance of External Shocks and Global Monetary Conditions for A Small-Open Economy

Author

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  • Gulnihal Tuzun

Abstract

The purpose of this study is to assess how do the domestic and foreign shocks affect the fundamental macroeconomic variables of a small-open economy, and in particular Turkey. The domestic supply, demand and monetary policy shocks as well as their global counterparts are identified by employing a Bayesian structural VAR model with sign and zero restrictions. After a US monetary tightening shock, the results demonstrate an appreciation of US Dollar against Turkish lira, a rise in the consumer price level in the Turkish economy, a contractionary monetary policy shock accompanied by a fall in the real output level. This reaction is a strong evidence of the existence of a global interest rate contagion present in the international macroeconomics literature.

Suggested Citation

  • Gulnihal Tuzun, 2021. "The Importance of External Shocks and Global Monetary Conditions for A Small-Open Economy," Working Papers 2109, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:2109
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2021/21-09
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    More about this item

    Keywords

    Bayesian VAR; Sign and zero restrictions; Shock identification; Monetary policy;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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