The effect of foreign income on economic performance of a small-open economy: evidence from Turkey

Abstract

The effect of a shock in the foreign economic performance on the domestic economy is an attractive research area. It has consistently been found that this effect is non-negligible. However, the countries examined are mostly developed countries. In this study, the effects of a shock in foreign economy on the economic performance of Turkey are examined. The estimates suggest that a positive shock in the foreign economy positively affects Turkish output, increases the inflation rate, and appreciates the real exchange rate.

Acknowledgements

We would like to thank Tao Zha for providing the computer codes that were used in this paper.

Notes

¹ For a vast literature survey in this topic, see Backus et al. (1995).

² See Sims (1986) and Gordon and Leeper (1994).