The Effects of Crude Oil Price Shocks on Türkiye’s Economic Performance: The Indirect Tax Channel

Abstract In this study, we explore the novel role of indirect taxes in moderating the effects of oil price shocks on economic performance. Typically, rising oil price shocks adversely affect oil-importing countries, but our findings indicate a favorable impact through indirect taxes on oil products. Using a Block-Exogeneity VAR model suitable for Türkiye's small open economy, which has high indirect taxes that account for 63% of the county's total tax revenues, and data from January 2006 to February 2024, we examine the effects on the current account, exchange rate, capital account, government spending, borrowing, and borrowing costs. Our evidence shows that higher crude oil prices boost indirect tax revenues, reducing government borrowing and costs. Without indirect taxes, oil prices would not affect the current account deficit statistically significantly. This study is among the first in which this relationship is quantified, demonstrating how strategic fiscal policies can use indirect taxes to improve budget balances, lower borrowing costs, decrease sovereign risk premiums, and foster economic stability. JEL Codes: C22, H20, H60, Q43