Quantifying uncertainty and identifying its impacts on the Turkish economy

Abstract

In this study, we first construct indices reflecting the financial uncertainty and the uncertainty perception of different agents such as consumers, firms and forecasters. Next, we construct an economic uncertainty index for Turkey based on newspaper coverage frequency. Then, in a dynamic factor model framework, we combine these uncertainty indices to obtain an aggregate measure of economic uncertainty for the Turkish economy. Finally, by using this measure, we investigate the impact of uncertainty on economic activity. Empirical evidence shows that uncertainty has adverse impacts on economic activity in Turkey and the most severe effects of uncertainty are observed on investment.