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    The TEPAV Financial Stress Index

    Fatih Özatay, PhD23 April 2013 - Okunma Sayısı: 998

    The TEPAV Financial Stress Index foresees the possibility of economic contraction in a given quarter two to three months ahead.

    GDP figures are released with a delay. Growth figure for the first quarter of 2013 will be released in mid-June. Changes in the level of economic activity are of importance for everyone. In all market economies, growth rates show a fluctuating outlook. GDP growth fluctuates in quite a smooth pattern with upward movements for four to five quarters followed by a movement in the opposite direction. For instance, Turkey’s annual GDP growth decreased constantly between the first quarter of 2011 and the last quarter of 2012. GDP growth is expected to pick up starting with the first quarter of 2013.

    It is difficult to estimate when an episode of slow growth will turn into an episode of rapid growth. The economy gives mixed signals about the turning points. In other words, the signals are usually unclear, blurred by noises. Foreseeing the turning points, however, are of critical importance for makers and executers of economic policy. For instance, if there are sufficient and convincing indicators that the episode of rapid growth is about to end, central bank of that country has to abandon the tight monetary policy. Indicators giving such message are called “the leading indicators.”

    Turkey now has a new leading indicator. It was designed by two esteemed academics, Harun Öztürkler and Türkmen Göksel on behalf of TEPAV with the aim to serve a slightly different function than I summarized above. TEPAV will release the index within the bimonthly Economic Outlook reports. Here is what the functional difference is about:

    The abovementioned fluctuations are a key feature of market economies. In addition are less common episodes of economic contraction, which are significant challenges for each and every economy. Following these episodes, unemployment rates hike, and corporate and financial sectors face challenges. In such periods, the economic management has to apply every tool at its disposal, starting with loosening fiscal policy. In response of the classical economic fluctuations, however, revising monetary policy is generally sufficient.

    If we assume that the data signals a recession, which is currently not the case for Turkey, it will be too late for a fiscal policy response since GDP figures are released with a lag. Fiscal policy responses required in such episodes cannot be realized overnight; some time is needed for legislative processes.

    Then, here is a critical question: can we have information about the possibility of economic contraction before the GDP figures are released? The TEPAV Financial Stress Index is devised to give this information. The Index has two key features with this respect. First, it foresees the possibility of economic contraction in a given quarter two to three months ahead. Second, as up-to-date figures for the variables involved in the index are available, it is possible to estimate the possibility of economic contraction in advance, before the GDP figures are released.

    On the other hand, the Index cannot foresee each and every incidence of economic contraction. For instance, it cannot foresee drops in GDP caused by natural disasters. The Index is indicative of the risk of contraction on the basis of financial factors. More on the Index is available on TEPAV’s website. I will continue.

    This commentary was published in Radikal daily on 23.04.2013