Abstract
In this study we investigated usefulness of oil price shocks in predicting switches between the growth phases of output in Turkey using monthly data for the period 1986-2014 by extending Markov Switching framework to include time-varying transition probabilities. We investigate the issue of whether the addition of various real oil price shocks to a univariate Markov Switching model for output can characterize the dynamics of business cycles better than the fixed transition probability version of Markov Switching model. The main results are summarized as follows. We find that although information about the lags of output growth and the information contained in transition probabilities combine to help identify which state of the economy has occurred in the TVTP model, oil price shocks are not the leading indicator of Turkish business cycle.
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