INTERACTIONS OF NON-PERFORMING LOANS WITH RECESSIONS AND MACROECONOMIC SHOCKS: A BAYESIAN ANALYSIS ON TURKEY

Abstract

In this study, the relationship between non-performing bank loans and recession possibilities in Turkey was analyzed. Thus, the extent and possible repercussions of the relationship between the stability of the banking system and economic activity are evaluated. Recessions and non-performing loans have strong interactions with many macroeconomic and financial variables. In this context, the factor‐augmented Qual VAR method was preferred in order to include macroeconomic shocks in the analysis. The analyzed sample consists of monthly data covering the period 2005:1 to 2023:10. The findings clearly demonstrated the strong interaction between non-performing loans and economic activity. In the case of Turkey, exchange rate and inflation shocks also have important effects on this relationship. The results showed that if the economy goes into recession, non-performing bank loans will increase and the contractionary policies implemented by the authorities who want to ensure both monetary and financial stability will serve exchange rate and price stability. However, in this case, the duration of the recession may be prolonged. On the other hand, if the inflation rate cannot be reduced despite contractionary policies, the effects of the recession will be more devastating and longer.