The effects of fiscal policy shocks on output in Turkey: SVAR analysis

This paper examines the dynamic effects of fiscal policy shocks on the Turkish economy using a three-variable structural vector autoregressive (SVAR) model for the period 1987:q1 – 2005:q4. The first differences of the variables are used, but the long-run relationship between the levels of the variables is also taken into account. In this paper, the strength of output responses to fiscal policy shocks, their persistence and timing were investigated. Following Blanchard and Perotti (2002), the identification of fiscal policy shocks is achieved by exploiting decision lags in fiscal policy and imposing reasonable restrictions on the revenue and spending elasticity to output. Consistent with the standard macroeconomic theories, it is found that while a positive spending shock increases output, a positive revenue shock decreases it.