Macroeconomic Impacts of Energy Price Shocks and Monetary Policy: An Estimated DSGE Model for Turkey

Abstract This study examines the impact of energy price shocks and the role of monetary policy in the face of energy price shocks within a Bayesian DSGE model over the quarterly period 2009:1-2021:4 for Turkey. The results demonstrate that the main macroeconomic variables such as GDP, domestic production, employment, investments, real wages experience a decline and both core and CPI inflation an increase in the presence of international energy price energy price shocks. Moreover, the different scenarios of monetary policy responses to both core inflation and output deviations from their steady states which are strong, baseline and weak policy responses are illustrated and discussed. In the scenario in which monetary policy responds most strongly to deviation in the core inflation in the face of energy shocks; the decline in GDP, domestic production, investments and employment and the increases in core and CPI inflation are the highest while the increase in real wages are the lowest. In the scenario where monetary policy reacts strongly to the output deviation, the decrease in real wages and the increase in core and CPI inflation are experienced as the highest, while the decrease in GDP, domestic production, investments and employment turn out to be the lowest. These effects appear to differ in scenarios where monetary policy responds weaker to inflation and the output gap. As for a policy implication, the internationally coordinated contractionary monetary policy can be pursued to restrain the negative impacts of the international shocks.