Real business cycles in emerging economies: Turkish case

Abstract

This paper attempts to answer the following question: Can a small-open-economy real business cycle (RBC) model driven by nonstationary productivity shocks explain business cycles in emerging economies? This question is addressed by estimating a dynamic stochastic general equilibrium model for Turkish economy using Bayesian methods in line with those suggested in the recent small open economy RBC literature. Results indicate that the standard RBC model driven by both stationary and nonstationary productivity shocks is not successful in replicating some of the key features of economic fluctuations. The alternative model with financial frictions provides a more realistic picture of business cycles. (C) 2013 Elsevier B.V. All rights reserved.