A neoclassical analysis of the 2001 crisis in Turkey

Abstract

In early 2001, Turkey experienced a severe economic crisis and many researchers attempted to qualitatively explain this downturn through analyzing the facts that caused the crisis and the effects it had on the economy. The focus of this paper is to complement these studies by quantitatively analyzing the economic fluctuations during the 2001 crisis in the light of the neoclassical growth theory. In this paper, it is shown that a standard dynamic stochastic small open economy model with exogenous productivity and real interest rate shocks, parameterized and calibrated to Turkish data from 1998 to 2006, is consistent with the observed features of fluctuations during the 2001 Turkish crisis. With both preference cases we consider, namely Cobb-Douglas and Greenwood- Hercowitz-Huffmann (GHH), the neoclassical model we adopted from [Otsu, 2008] predicts the contraction of the economy correctly. We examine the channels through which variables respond to productivity and interest rate shocks separately and find out that having both shocks together results in successful performance of both preference cases, except for labor in the GHH case and consumption in the Cobb-Douglas case. Although both cases successfully generate a countercyclical trade balance, GHH case performs better in generating a highly volatile consumption and Cobb-Douglas case performs better in capturing the modest shrink in labor.