Interaction of monetary and fiscal policies in Turkey

Özet

This paper aims to investigate the interaction between monetary and fiscal policies in Turkey. For thispurpose, a Bayesian Structural Vector Autoregression (SVAR) model with sign and zero restrictions isused. We particularly focus on how the fiscal and monetary policy variables respond to various macroeconomic shocks and whether the type of shocks matters. Our results confirm the importance ofnature of shocks in terms of interaction between monetary and fiscal policies with the finding that bothpolicy shocks are complementary in response to demand and supply shocks while they are substitute inresponse to shocks caused by the each other. Our main findings are robust to alternative variable definitions and identifying restrictions.