The Time-Varying Effect of Asset Prices on Turkey's Circular Economy

Abstract

The study aims to examine the effects of spillovers from stock prices on consumption and interest rates in Turkey. From the circular economy viewpoint, there should be sustainable consumption to achieve sustainable development with the help of consumers and other stakeholders. A time-varying vector autoregressive (TVP-VAR) model with stochastic volatility is used in the study. The aim is to obtain dynamics that stimulate growth, development, recession or change within the Turkish economy according to the emphases on circular economy. In order to analyze the relationship between real consumption, nominal interest rate and real stock prices, the TVP-VAR model is specified as a three-variable, time-varying model. The sample data that have been gathered from the Central Bank of the Republic of Turkey cover the period between Q1 1987 and Q3 2013. Overall, this study provides significant evidence of spillovers on consumption and interest rate during financial crises in Turkey, and the implications of monetary policy. In addition, the TVP model with stochastic volatility offers remarkable results regarding the influence of price shock on consumption in Turkey. However, we do not find any significant effect from interest rate to real consumption.