FINANCIAL STRESS AND MACROECONOMIC DYNAMICS: A SIGN RESTRICTED SVAR ANALYSIS ON TÜRKİYE

Abstract

This study analyzes the dynamic interactions between financial stress, exchange rate, interest rate, inflation, and real economic activity in the Turkish economy within the framework of a sign restricted structural vector autoregression (SVAR) model. The analysis, conducted using monthly data covering the period 2005:1–2026:2, includes a financial stress index calculated and incorporated into the model. This comprehensively examines the effects of vulnerabilities in financial markets on macroeconomic variables. The findings indicate a strong pass-through effect between the exchange rate and inflation in the Turkish economy, with exchange rate shocks having rapid and significant effects on the general price level. Monetary policy shocks, on the other hand, have a lowering effect on the exchange rate and a delayed but permanent deflationary effect on inflation. These results point to the effectiveness of the monetary policy transmission mechanism operating through interest rate and exchange rate channels. Examining the effects of financial stress shocks on real economic activity, it was determined that increased financial stress leads to a significant decrease in the level of production by contracting the credit supply. Furthermore, it was observed that financial stress has a strong interaction with the exchange rate, and these two variables tend to move together. The variance decomposition results reveal that inflation dynamics are largely explained by exchange rate and monetary policy shocks, while financial stress also plays a significant complementary role. These findings indicate a strong interdependence between price stability and financial stability in the Turkish economy. In this context, it is concluded that monetary policy implementations should be designed with a holistic approach that considers financial stability.