Abstract

This study analyzes the effects of some major macroeconomic variables on construction sector activity in Turkey by employing a Vector Autoregression (VAR) model from 1990Q1 to 2010Q3. The 4-variable VAR model includes the log of construction sector activity (COACT), the log of real gross domestic product (RGDP), weighted averages of 12-month interest rate on deposit (INT) and the log of banking sector total domestic credits (CRE). According to VAR model impulse response analysis, the sector booms related to a positive one standard deviation shock in RGDP. Thereby, the importance of maintaining economic stabilization is revealed since economic contractions may affect the sector negatively. In addition to this finding, impulse response analysis indicates that a positive one standard deviation shock in INT deteriorates the construction sector activity. Therefore, interest rates should be kept low by the coordination of monetary and fiscal policy. Moreover, impulse response analysis results emphasize that credit supply and demand should be equalized for minimizing default risk. On the other hand, forecast error variance decomposition (FEVD) analysis infers the importance of real gross domestic product, weighted averages of 12-month interest rate on deposit and banking sector total domestic credits in determining construction sector activity.

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