Financial Stress and Effect on Real Economy: The Turkish Experience

Yildirim, Yusuf and Sanyal, Anirban (2021): Financial Stress and Effect on Real Economy: The Turkish Experience.

Abstract

In this paper, we aim to analyze empirically how economic activity reacts to the financial stress shocks depending on the stress regime in Turkey. Using quarterly data, the effect of financial stress is examined using two threshold vector autoregression model (TVAR) for consumption, investment and real GDP by using financial stress index, credit growth and inflation rate as endogenous variables. The paper proposes local projection approach for estimating threshold VAR model as robustness check to overcome the data limitations. The main result of this paper is that the effect of financial stress on consumption, investment, and real GDP, such as magnitude and significance, vary greatly depending on the financial stress regime. The paper finds that financial stress is found to affect economic growth when the stress level is already high. This corroborates with the effectiveness of credit channel in the financial friction mechanism. On the contrary, the financial stress does not affect real economic activities to significantly during low stress regime. The effect of financial stress impairs consumption and investment growth during high stress regime which leads to slow down of economic activities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial stress index, Threshold VAR model, Markov Switching Model, Local Projection, Forecast Error Variance Decomposition
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G0 - General > G01 - Financial Crises

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