An asymmetric analysis of the relationship between oil prices and output: The case of Turkey

- The asymmetric impact of oil shocks on output is investigated.
- Threshold VAR model is used to investigate asymmetric relationship.
- Two different regimes are detected in terms of the evolution of oil price changes.
- Oil shocks have a significant impact on inflation and output in the second regime.

In this paper we analyze the asymmetric impact of oil price changes on the economic activity in Turkey. In contrast to previous studies on Turkey, the existence of an asymmetric relationship between economic activity and oil prices is investigated by regime-dependent impulse response functions and forecast error variance decompositions based on a multivariate two-regime Threshold VAR (TVAR) model. Our analysis suggests that the relationship between oil prices and macroeconomic activity is nonlinear and exhibits an asymmetric pattern: oil price changes have a significant effect on inflation and output when the change exceeds a certain threshold level. The lower response of macroeconomic variables to oil price shocks in the low oil price change regime also indicates that only the shocks exceeding the optimal threshold level are able to create a contraction in the economic activity.