The time-varying impacts of global economic policy uncertainty on macroeconomic activity in a small open economy: the case of Turkey

This study aims to analyze the time-varying effects of global economic policy uncertainty (GEPU) shocks on macroeconomic activity in Turkey over the quarterly period of 1999q1 to 2020q4. To this end, the study uses the GEPU index developed by Davis (Working paper 22740, National Bureau of Economic Research, 2016) and employs the time-varying parameter vector autoregression (TVP-VAR) model. Empirical evidence shows that the GEPU shocks have adverse effects on the macroeconomic activity as they result in declines in share prices, investment, employment, consumption, and GDP growth. It is also evident that these effects vary over time, with the highest impact observed following the crises periods such as the 9/11 attacks, the Iraq invasion, the global financial crisis (GFC), and the Covid-19 pandemic. The time-varying impacts typically reach the maximum in the first and second lag periods, and the most severe impacts of uncertainty are observed on share prices and investment. The study also examines three substantial events (the 9/11 attacks, the GFC, and the Brexit referendum) and finds that the responses of the underlying variables to GEPU shocks vary both in magnitude and signs over the sample period. The responses of the variables are mainly more severe during the periods when geopolitical and economic concerns are high compared to periods of political crises. Overall, the findings from the analyses indicate that the Turkish economy still maintains its fragile structure and suggest that the adverse macroeconomic effects of foreign uncertainty shocks do not remain the same over time.