Financial market participation and business cycles in Turkey

Official URL: https://risc01.sabanciuniv.edu/record=b2578831 _(Table of contents)

This study examines the effect of limited financial participation on business cycle characteristics of emerging market economies using the model of Özbilgin (2010), where the standard small open economy business cycle model is extended to include heterogeneous agents that are differentiated by their ability to borrow and accumulate capital. First, I document that developing countries have less financial market participation than advanced economies. I then calibrate this model to the Turkish economy and analyze the effect of changes in the level of financial inclusion on business cycle characteristics. The results show that having higher financial inclusion, similar to the levels of advanced economies, results in higher consumption smoothing and lower countercyclicality of the trade balance. I also extend the model by adding interest rate shocks and show that the combined model matches business cycle statistics better than the limited participation model