Accounting Business Cycles of an Emerging Market: An Application to Turkey Ceyhun Elgin Deniz C ¸ i¸cek Bogazici University University of Minnesota Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 1 / 25 Question What factors drive business cycle fluctuations in Turkey? We are curious about the answer of this question because of both theoretical and practical reasons: Practically, we want to identify the business cycle fluctuations and their sources in Turkey Doing this might help us giving some policy recommendations. On the theoretical side, we want to understand the economic mechanism which leads to these cycles. Once we can identify the dominant force behind these cycles, this will give us the direction on which further research on the Turkish economy has to be made. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 2 / 25 Turkish vs. US Business Cycles Figure 1 Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE Figure 2 2011 3 / 25 Literature In the literature on the Turkish economy there aren’t many studies on evaluating the growth performance of Turkey from a neoclassical perspective, neither are there studies of business cycles. Among the few examples, Altug, Filiztekin, and Pamuk (2008) study the sources of the long-term economic growth in Turkey from 1880 to 2005 and find that that output growth in Turkey is primarily due to capital accumulation, not due to the growth of TFP On the other hand, Ismihan and Metin-Ozcan (2006) find that both TFP and capital accumulation were both important sources of growth over the sample period. Cicek and Elgin (2010) find out evidence that TFP is the crucial determinant to understand the evolution of output per capita in Turkey One should note that the primary focus in these studies was to find the main factor affecting economic growth in Turkey. Our focus in this paper will be to understand the factors causing the business cycles Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 4 / 25 BCA Procedure To study the business cycles in the Turkish economy we borrow from the Business Cycle Accounting (BCA) framework developed by Chari, Kehoe, and McGrattan (2007a) by introducing time-varying wedges, each representing different types of distortions or shocks, to an otherwise standard one-sector neo-classical growth model. Efficiency wedge Labor wedge Investment wedge Government accounting wedge Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 5 / 25 BCA Procedure Efficiency wedge stands for the total factor productivity and input-financing frictions. Credit frictions, capital or consumption taxes lead to the investment wedge. Labor wedge captures labor market frictions such as unionization or sticky wages and monetary shocks. Government accounting wedge captures trade shocks and frictions and also shocks to government spending. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 6 / 25 BCA Literature This method of identifying the frictions in the economy using the BCA framework drew increasing attention lately, in spite of some criticisms against it. (See Christiano and Davis (2006) and Chari et. al. (2007b) for a discussion about this.) Examples: Kobayashi and Inaba (2006) for the Japanese economy Lama (2005) for Argentina, Brazil and Mexico. Cavalcanti (2004) for Portugal Gao (2007) for China Kersting (2008) for UK Simanovska and S¨ oderling (2008) for Chile. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 7 / 25 The Model Households maximize: ∞ X X β t πt (s t )U(ct (s t ), 1 − lt (s t ))Nt t=0 s t subject to the budget constraint, Ct (s t )+(1+τxt (s t ))Xt (s t ) = rt (s t )Kt (s t−1 )+(1−τlt (s t ))wt (s t )Lt (s t )+Tt (s t ) the law of motion of capital, Nt+1 kt+1 (s t ) − (1 − δ)kt (s t−1 ) = xt (s t ) Nt and the non-negativity constraint, ct (s t ), lt (s t ), xt (s t ) ≥ 0 Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 8 / 25 The Model On the production side: Yt (s t ) = At (s t )F (Kt (s t−1 ), Zt Lt (s t )), where Zt = (1 + γ)t . Therefore, the representative Firms maximizes the following profit function: At (s t )F (Kt (s t−1 ), Zt Lt (s t )) − rt (s t )Kt (s t−1 ) − wt (s t )Lt (s t ). Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 9 / 25 The Model Finally, Nt kt (s t−1 ) = Kt (s t−1 ) Nt lt (s t ) = Lt (s t ) and the aggregate resource constraint Nt (ct (s t ) + xt (s t )) + Gt = (Ct (s t ) + Xt (s t )) + Gt = Yt (s t ) where working-age population grows at a constant rate, i.e. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 Nt+1 Nt = 1 + gn . 10 / 25 The Model For practical purposes of our analysis, we assume the following functional forms for the utility and production functions U(Ct , Lt ) = ln(Ct ) + ψln(1 − Lt ) F (Kt , Zt Lt ) = Ktα (Zt Lt )1−α Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 11 / 25 The Model Some manipulation of the first order conditions yield the following equations for de-trended variables 1 + τxt cˆt yˆt ψˆ ct = (1 − τlt )(1 − α) 1 − lt lt 1 y ˆ t ˆ t = βE (θ + (1 − δ)(1 + τxt+1 )) cˆt+1 kˆt+1 (1) (2) These two equations, together with cˆt + gˆt + (1 + gn )(1 + gz )kˆt+1 − (1 − δ)kˆt = yˆt yˆt = kˆtα (zt lt )1−α (3) (4) completely characterize the competitive equilibrium. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 12 / 25 Parameter Choice: Yearly Data from 1968 to 2005. α is taken from Ismihan and Metin-Ozcan (2006) as 0.425. δ is taken from Cicek and Elgin (2010) as 0.047. β and ψ are calibrated as 0.984 and 3.88. gn =0.0224 is from SPO and γ=0.015 from a growth accounting exercise. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 13 / 25 Yearly Wedges Figure 3 Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 14 / 25 Output: DataData vs.vs. Model Figure 4. Output: Models with Efficiency, Labor, Investment and Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 15 / 25 Investment: Data vs. Model Figure 5. Investment: Data vs. Models with Efficiency, Labor, Investment and Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 16 / 25 Hours DataData vs.vs.Model Figureworked: 6. Hours Worked: Models with Efficiency, Labor, Investment and Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 17 / 25 Consumption: DataData vs. vs.Model Figure 7. Consumption: Models with Efficiency, Labor, Investment and Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE Figure 8. 2011 18 / 25 Parameter Choice: Quarterly Data from 2000 to 2009. α is taken from Ismihan and Metin-Ozcan (2006) as 0.425. δ is taken from Cicek and Elgin (2010) as 0.0105. β and ψ are calibrated as 0.99 and 3.60. gn =0.047 is from SPO and γ=0.03 from a growth accounting exercise. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 19 / 25 Quarterly wedges Figure 8. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 20 / 25 Output: Data Modelwith Efficiency, Labor, Investment and Gov ure 9. Output: Datavs. vs. Models Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 21 / 25 Figure 10. Investment: vs. Models with Efficiency, Labor, Investment Investment: Data Data vs. Model Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 22 / 25 worked: Data vs.vs.Model ureHours 11. Hours Worked: Data Models with Efficiency, Labor, Investmen Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 23 / 25 gure 12. Consumption: Data Models with Efficiency, Labor, Investmen Consumption: Data vs.vs.Model Goverment Accounting Wedges Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 24 / 25 Concluding Remarks Our business cycle accounting exercise suggests that efficiency wedge is the most important among the four wedges considered Next comes the labor wedge for certain periods. This suggest that productivity considerations alone best explain the evolution of aggregate economic variables in Turkey throughout the 1968-2005 period. On the other hand, labor market considerations are also important for the 2000-2009 period. The predictive power of the efficiency and labor wedges suggests that labor market rigidities and input financing frictions should be a focus for policy. Elgin and C ¸ i¸cek (BOUN, UMN) EUROCONFERENCE 2011 25 / 25
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