Real Business Cycles in Emerging Economies

Abstract

Emerging Market Economies (EMEs) exhibit different economic dynamics compared to developed markets. While several EMEs have strong growth due to their trade surplus, most of them rely on imported inputs for their production processes and face a significant amount of foreign debt. This thesis seeks to address two crucial research questions concerning the distinctive characteristics of EMEs. The primary objective is to investigate the origins and transmission mechanisms behind economic fluctuations in an EME characterized by a trade deficit and substantial foreign debt. The other objective is to identify the fundamental attributes of EMEs that rely on imported inputs, taking into account different sectors.

Türkiye is an appropriate subject for the study because it has consistent trade deficits and a significant amount of foreign debt. In Chapter 1, we employ both a dynamic stochastic general equilibrium (DSGE) model and the Bayesian estimation technique using the Turkish data. The results indicate that Türkiye exhibits a higher degree of sensitivity to growth shocks. Furthermore, analyzing the fluctuations of the trade balance to output ratio reveals that country premium and domestic spending shock processes, both in the medium and long terms, account for a substantial portion of its fluctuations. The most significant finding is the model's ability to accurately capture the fluctuations in Türkiye's crisis periods (1994, 2001, and 2009).

Over time, the production of final goods has become more reliant on imported inputs. The reasoning behind this situation led to the creation of a conceptual framework in Chapter 2, which includes imported inputs as a factor of production and distinguishes between different sectors. To the best of our knowledge, there is a scarcity of literature that combines imported inputs in production processes and sector differentiation within a theoretical model. The model's findings indicate that there is an inverse relationship between non-tradable goods sector and the macroeconomic variables associated with international trade. Moreover, country premium shock holds the highest significance in elucidating the macroeconomic fluctuations.