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The time-varying impacts of global economic policy uncertainty on macroeconomic activity in a small open economy: the case of Turkey

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Abstract

This study aims to analyze the time-varying effects of global economic policy uncertainty (GEPU) shocks on macroeconomic activity in Turkey over the quarterly period of 1999q1 to 2020q4. To this end, the study uses the GEPU index developed by Davis (Working paper 22740, National Bureau of Economic Research, 2016) and employs the time-varying parameter vector autoregression (TVP-VAR) model. Empirical evidence shows that the GEPU shocks have adverse effects on the macroeconomic activity as they result in declines in share prices, investment, employment, consumption, and GDP growth. It is also evident that these effects vary over time, with the highest impact observed following the crises periods such as the 9/11 attacks, the Iraq invasion, the global financial crisis (GFC), and the Covid-19 pandemic. The time-varying impacts typically reach the maximum in the first and second lag periods, and the most severe impacts of uncertainty are observed on share prices and investment. The study also examines three substantial events (the 9/11 attacks, the GFC, and the Brexit referendum) and finds that the responses of the underlying variables to GEPU shocks vary both in magnitude and signs over the sample period. The responses of the variables are mainly more severe during the periods when geopolitical and economic concerns are high compared to periods of political crises. Overall, the findings from the analyses indicate that the Turkish economy still maintains its fragile structure and suggest that the adverse macroeconomic effects of foreign uncertainty shocks do not remain the same over time.

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Notes

  1. The reason for using this period is that the data of the macroeconomic variables can be obtained from the databases without interruption.

  2. EPU indices reflect the relative frequency of each country’s newspaper articles that contain a trio of terms pertaining to the economy, policy, and uncertainty. Technical information for measuring EPU and GEPU indices is available in Baker et al. (2013) and Davis (2016).

  3. The United States, the United Kingdom, Australia, France, Germany, Spain, Ireland, Italy, the Netherlands Sweden, Greece, Canada, China, Japan, Russia, South Korea, Mexico, Chile, Colombia, Brazil, and India.

  4. All the growth rates are computed as a percentage change from same quarter of previous year.

  5. The test has superior finite sample size and power properties to Harvey and Leybourne (2007) linearity test when the order of integration is unknown (Khraief et al. 2020). For more detailed information on these tests, see (Harvey et al. 2008).

  6. The causality between the variables is also checked for different lags and found that there is unilateral causality running from GEPU to all other macroeconomic variables at lags from 2 to 5. The study also checked the causal relationship between the variables using the leveraged bootstrap approach developed by Hacker and Hatemi-J (2006) since this approach overcomes problems of non-normality and ARCH effects in the data. The method points to the same result as the Granger causality test.

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Acknowledgements

The authors thank the editor, Ana Fernandes, and anonymous referees for helpful comments and suggestions. This work was derived from Muhammet Daştan's Ph.D thesis at Atatürk University, Graduate School of Social Sciences, Erzurum, Turkey.

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Authors and Affiliations

  1. Faculty of Economics and Administrative Sciences, Ağrı İbrahim Çeçen University, Ağrı, Turkey

    Muhammet Daştan

  2. Faculty of Economics and Administrative Sciences, Atatürk University, Erzurum, Turkey

    Kerem Karabulut & Ömer Yalçınkaya

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  1. Muhammet Daştan
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Appendix

Appendix

Table 4 Linear Unit Root Test Results
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Table 5 Nonlinear Unit Root Test Results
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Table 6 Granger Causality Test Results
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Table 7 Forecast Error Variance Decompositions
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Table 8 Estimation Results of Parameters in the TVP-VAR model
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Table 9 Estimation Results of Parameters: TVP-VAR-1 Model
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Fig. 5
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Time-Varying Impulse Responses at Different Time Horizons: TVP-VAR-1 Model

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Table 10 Estimation Results of Parameters: TVP-VAR-2 Model
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Fig. 6
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Time-Varying Impulse Responses at Different Time Horizons: TVP-VAR-2 Model

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Table 11 Estimation Results of Parameters: TVP-VAR-3 Model
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Fig. 7
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Time-Varying Impulse Responses at Different Time Horizons: TVP-VAR-3 Model

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Table 12 Forecast Error Variance Decompositions: TVP-VAR-1 Model
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Table 13 Forecast Error Variance Decompositions: TVP-VAR-2 Model
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Table 14 Forecast Error Variance Decompositions: TVP-VAR (3) Model
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Table 15 Granger Causality Test Results: TVP-VAR-1 Model
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Table 16 Granger Causality Test Results: TVP-VAR-2 Model
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Table 17 Granger Causality Test Results: TVP-VAR-3 Model
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Fig. 8
figure 8

Impulse Response to an GEPU shock: Single-Frequency VAR Model

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Fig. 9
figure 9

Impulse Response to an GEPU shock: Mixed-Frequency VAR Model-1

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Fig. 10
figure 10

Impulse Response to an GEPU shock: Mixed-Frequency VAR Model-2

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Fig. 11
figure 11

Impulse Response to an GEPU shock: Mixed-Frequency VAR Model-3

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Daştan, M., Karabulut, K. & Yalçınkaya, Ö. The time-varying impacts of global economic policy uncertainty on macroeconomic activity in a small open economy: the case of Turkey. Port Econ J 23, 275–311 (2024). https://doi.org/10.1007/s10258-023-00239-0

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