Can a Two-Sector Business Cycle Model Account for the 2001 Recession of Turkey?

Abstract

This paper investigates whether a two-sector small open economy real business cycle model calibrated to match Turkish data is able to account for the simultaneous sharp reversal in the current account, real exchange rate depreciation, and the severe recession observed in the aftermath of the 2001 financial and currency crisis of Turkey. Estimated shocks for the model's eight exogenous variables are used to simulate model dynamics, and the resulting time series are compared to the actual series. The model does a fairly good job in matching the output drop, while it faces difficulty in matching the sharp real exchange rate depreciation.Business cycles, Turkey