Business cycle accounting in a small open economy: the case of Turkey

In this study, we analyze the business cycles in the Turkish economy for the period 2000:Q1-2017: Q3 by implementing the Business Cycle Accounting method, proposed by Chari, Kehoe, and McGrattan (2007), in a small open economy model. There are four sources of fluctuations in the model: the efficiency wedge, the labor wedge, the capital wedge, and the bond wedge. The accounting procedure indicates that distortions represented by efficiency and labor wedges are the main factors in explaining the aggregate fluctuations in Turkey. The results also show that the bond wedge is important for the consumption and investment dynamics, while the capital wedge seems to be important mainly for investment.