The IS Puzzle and Relative Risk Aversion in Turkey
Mustafa Ege Yazgan
Istanbul Bilgi University
Florida International University
June 24, 2008
Empirical Economics Letters, Forthcoming
This paper estimates the IS curve of the Turkish economy for the monthly period over 1996M1-2007M11 by using GMM. It is found that, when a structural small open economy model is used and data are constructed carefully, forward-looking IS curve works perfectly in Turkey, which is against the IS puzzle. Moreover, as opposed to the literature which usually assumes an ad hoc unit coefficient of relative risk aversion or estimates it below unity for developed countries, this paper estimates the same coefficient as 1.89 implying that one percent of a cyclical movement of the real interest rate above its natural rate leads to a 1.89% decrease in output gap. This shows that the Turkish economy is more sensitive to changes in real interest rate compared to developed countries. The empirical results are supported by recently developed statistics that are immune to the issue of weak identification.
Number of Pages in PDF File: 10
Keywords: IS Curve, Relative Risk Aversion, Turkey
JEL Classification: E30, E40, E50
Date posted: June 24, 2008 ; Last revised: May 27, 2010
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