The effects of crude oil price shocks on Türkiye's fiscal performance: The indirect tax channel

In this study, we examine a novel role of indirect taxes in moderating the effects of crude oil price shocks on economic performance. While higher oil prices are typically expected to harm oil-importing economies, our findings show that they can have a favorable impact through indirect taxes on oil products. Using a block-exogeneity VAR model tailored to Türkiye's small open economy, characterized by high indirect taxes that account for 63% of total tax revenues, and monthly data from January 2006 to February 2024, we analyze the effects of crude oil price shocks on the current account, exchange rate, capital account, government spending, borrowing, and borrowing costs. The evidence indicates that higher crude oil prices raise indirect tax revenues, thereby reducing government borrowing and borrowing costs. Moreover, the empirical results suggest that, in the absence of an indirect tax response (i.e., if indirect taxes were zero or held constant), oil prices would not have a statistically significant effect on the current account deficit. This study is among the first to quantify this mechanism and shows that strategic fiscal design, combined with high indirect taxes on oil products, can strengthen budget balances, lower borrowing costs, reduce sovereign risk premiums, and enhance economic stability.