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The IS Puzzle and Relative Risk Aversion in Turkey

Mustafa Ege Yazgan

Istanbul Bilgi University

Hakan Yilmazkuday

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

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Date posted: June 24, 2008 ; Last revised: May 27, 2010

Suggested Citation

Yazgan, Mustafa Ege and Yilmazkuday, Hakan, The IS Puzzle and Relative Risk Aversion in Turkey (June 24, 2008). Empirical Economics Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1151003

Contact Information

Mustafa Ege Yazgan
Istanbul Bilgi University ( email )
Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Hakan Yilmazkuday (Contact Author)
Florida International University ( email )
11200 SW 8th Street
Miami, FL 33199
United States
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