STRUCTURAL VAR MODELING OF MONETARY POLICY FOR SMALL OPEN ECONOMIES: THE TURKISH CASE

İlyas ŞIKLAR (Anadolu University)
Murat TAŞDEMİR (Osmangazi University)
Ethem ESEN (Anadolu University)
Kağan ÖZDEMİR (Anadolu University)

Structural vector autoregressive models are widely used for the empirical research on monetary policy. In addition to the well-known anomalies such as the so called "price", "liquidity", "exchange rate" and "forward discount bias" puzzles these models produce, they face some other challenges when applied to small open economies.

In this paper, we discuss some of the issues about the structural VAR modeling of monetary policy that arise in the small open economy context, and specific to the Turkish economy relating to the previous work on Turkey and other small open economies. We estimate several different structural VAR models for Turkey using monthly data for the sample period 1990:1-2002:3. Our focus is mainly on the alternative identifying assumptions of the structural forms and their empirical and theoretical implications. In the models estimated, we use both recursive and non-recursive contemporaneous restrictions to model the structure of the economy and the monetary policy. We also perform various monetary policy experiments using our choice of the model to address the price, liquidity and exchange rate puzzles.