The nonlinear analysis of external dynamics on economic growth: The case of Turkey

Purpose - This paper attempts to analyse the empirical link between economic growth and the external shocks in a small open developing economy, Turkey, focusing on the nonlinearity between the dynamics for the 1992-2011 period. Design/methodology/approach - This paper examines the effects of trade and financial openness and oil price, the most important trading partners' GDP growth as well as for external dynamics of economic growth. To this end, this paper employs a Structural VAR (SVAR) and a nonlinear Markov-Switching VAR model. We examine the nonlinearity to let the effects of the external dynamics vary with the level of economic growth. Findings - The results suggest the external dynamics considered in this paper - namely trade and financial openness, oil prices and growth rate of Germany - initially explain 29% of economic growth in Turkey, according to the linear estimation method. In the long run, this percentage climbs to 51%. The nonlinear analysis shows that the magnitude of the effect of the external dynamics in recession periods is almost twice as high as in expansion. Research limitations/Implications - This paper provides first attempt of the nonlinear analysis of the growth - external dynamics for Turkey, future research effort is required to substantiate our findings. Originality/value - The originality of this paper lies in the finding that the effects of external dynamics on economic growth differs according to the growth stage as the economy is in the expansion period or recession period.