The IS Puzzle and Relative Risk Aversion in Turkey

Empirical Economics Letters, Forthcoming

10 Pages Posted: 24 Jun 2008 Last revised: 27 May 2010

Mustafa Ege Yazgan

Istanbul Bilgi University

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Date Written: June 24, 2008

Abstract

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.

Keywords: IS Curve, Relative Risk Aversion, Turkey

JEL Classification: E30, E40, E50

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

Mustafa Ege Yazgan

Istanbul Bilgi University ( email )

Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Turkey

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

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