The impacts of oil price shocks in Turkey: sectoral evidence from the FAVAR approach

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The impacts of oil price shocks in Turkey: sectoral evidence from the FAVAR approach Uğur Akkoç1   · Anıl Akçağlayan2 · Gamze Kargın Akkoç3 Received: 17 March 2020 / Accepted: 22 August 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020

Abstract This paper investigates the effects of crude oil price shocks on the Turkish economy from 2005:01 to 2018:04 using a relatively new technique: the factor-augmented vector autoregressive (FAVAR) approach. The findings indicate the importance of crude oil prices to inflation, sectoral growth, and monetary policy. The main results of the impulse response analyses are as follows: (1) Oil price shocks did not explain changes in industrial production growth or its subsectors; (2) the responses of different price indices to positive oil price shocks are statistically significant and persistent. The largest number of price increases occurs in the transportation and food and beverage sectors; (3) monetary policy does not respond to oil price shocks. One can claim that the interest rate does not respond to oil price and allow the prices to adjust. Afterward, the price adjustment neutralizes the production effects of the oil price shocks. Keywords  FAVAR · Turkey · Oil price · Inflation · Food price JEL Classification  C32 · C38 · Q43 · E31

* Uğur Akkoç [email protected] Anıl Akçağlayan [email protected] Gamze Kargın Akkoç [email protected] 1

FEAS, Pamukkale University, Denizli, Turkey

2

Faculty of Political Sciences, Ankara University, 06590 Ankara, Turkey

3

Faculty of Political Sciences, Ankara Yıldırım Beyazıt University, Ankara, Turkey



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Economic Change and Restructuring

1 Introduction The effects of oil price changes have been an important topic since Hamilton (1983) concluded that oil price changes have had a considerable impact on almost all US recessions since World War II.1 It is well known that the dramatic increases from $3.30 to $11.50 per barrel in just 1 year (1973) caused a worldwide recession: the oil crisis. Thus, the historical evidence shows that oil price increases may have powerful and adverse effects on both developed economies and oil-importing countries like Turkey. After an unfavorable oil supply shock, oil- and energy-importing countries face a permanent fall in economic activity, while the impact is insignificant or even positive in net energy-exporting countries, and the inflationary effects are smaller in the latter group (Baumeister et al. 2010). One can claim that oil dependency determines the magnitude of the effects of oil prices on developing economies. The theoretical literature has proposed several different channels to account for the inverse relationship between oil prices and economic activity. First, according to supply-side effects, oil is a vital input of production. Rising oil prices reduce the availability of oil input for firms. Production becomes increasingly expensive, and output declines. Another effect of the oil prices is the adjustment of cost channel. Oi