Estimating Effects of Uncertainty on the Turkish Economy

In this paper, an uncertainty measure for Turkey is developed through principal component analysis based on a number of uncertainty proxies from three main financial markets and the Expectations Survey. Then, using this measure, a vector autoregression model is constructed to estimate the effects of uncertainty shocks on the Turkish economy. The results present evidence that uncertainty shocks are associated with a fall in industrial production, worsening consumer confidence, and rises in unemployment, inflation and credit interest rates. Uncertainty shocks seem similar to supply shocks, which cause economic activity to fall and inflation to rise