Measuring optimal macroeconomic uncertainty index for Turkey

Macroeconomic uncertainty in Turkey has been a major problem for a very long time. Recent structural and institutional changes in the Turkish economy drive us to measure new macroeconomic uncertainty index. There are several different approaches to measure macroeconomic uncertainty in the empirical literature. A common approach is to produce proxies using the estimated conditional volatility of any variable. This approach only pays attention to individual uncertainty of the main macroeconomic variables. However, if any individual uncertainty index such as inflation uncertainty is used as macroeconomic uncertainty, the findings from the index cannot correctly provide some policy implications. Therefore they can cause large welfare losses for a whole economy. Instead, Gan (2013) suggests producing the optimal macroeconomic uncertainty index in a structural macroeconomic model, using an optimization algorithm. This approach provides the optimal uncertainty level of macroeconomic conditions and serves as a policy tool for future uncertainty levels. The aim of this study is to calculate the optimal macroeconomic uncertainty index for the Turkish Economy. The data used in the study are quarterly and cover the period of 2002-2014. In this study, the index is formed under the assumption of small structural macroeconomic model. The study has three important econometric processes: First, the model is separately estimated by using the generalized method of moments (GMM), seemingly unrelated regressions (SUR) and ordinary least squares (OLS). Secondly, Broyden–Fletcher–Goldfarb–Shanno (BFGS) is applied as an optimization algorithm. BFGS calibrates the model using GMM, SUR and OLS parameter estimations for the benchmark parameters. Then, the variables of the index are weighted under the estimated optimal coefficients and finally, aggregated to produce the optimal macroeconomic uncertainty index. The optimal macroeconomic uncertainty index measured in this study is compared to the general economic situation index produced by Central Bank of the Republic of Turkey. The optimal macroeconomic uncertainty index is found to be negatively and significantly correlated with the general economic situation index. Thus, the optimal macroeconomic uncertainty index can be substituted for the general economic situation index in Turkish economy.