The impacts of oil price shocks in Turkey: sectoral evidence from the FAVAR approach

Abstract

This paper investigates the effects of crude oil price shocks on the Turkish economy from 2005:01 to 2018:04 using a relatively new technique: the factor-augmented vector autoregressive (FAVAR) approach. The findings indicate the importance of crude oil prices to inflation, sectoral growth, and monetary policy. The main results of the impulse response analyses are as follows: (1) Oil price shocks did not explain changes in industrial production growth or its subsectors; (2) the responses of different price indices to positive oil price shocks are statistically significant and persistent. The largest number of price increases occurs in the transportation and food and beverage sectors; (3) monetary policy does not respond to oil price shocks. One can claim that the interest rate does not respond to oil price and allow the prices to adjust. Afterward, the price adjustment neutralizes the production effects of the oil price shocks.