The Macroeconomic Effects of Sovereign Risk Premium Shock: A Case Study for Turkey

The macroeconomic effects of sovereign risk premium shocks in Turkey are investigated by employing Structural Vector Autoregression Model for the period 2005:12 - 2017:3. The model includes EMBI+TR as an indicator of sovereign risk premium for Turkey. The empirical results of the model indicate that structural shocks in sovereign risk premium affect macroeconomic variables negatively in Turkey. One standard deviation shock in EMBI+TR results in devaluation of Turkish Lira, increase in price level, contraction in credit volume, decline in industrial production index and increase in current account balance. The impact of the negative changes in the sovereign risk premium on the exchange rate and the credit is higher compared to the other variables. It is concluded that results from variance decomposition are consistent with the results of the impulse - response analysis and the impact of structural shocks in sovereign risk premium on credit is higher compared to other variables