Financial Stress and Effect on Real Economy: The Turkish Experience

Yusuf Yildirim and Anirban Sanyal

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Financial stress index; Threshold VAR model; Markov Switching Model; Local Projection; Forecast Error Variance Decomposition (search for similar items in EconPapers)
JEL-codes: C01 C32 G01 (search for similar items in EconPapers)
Date: 2021-09-21
New Economics Papers: this item is included in nep-ara, nep-cwa, nep-fdg and nep-mac
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Journal Article: Financial Stress and Effect on Real Economy: Turkish Experience (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:109845

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