Regime-Dependent Monetary Policy Responses and Welfare Losses Under Growth Volatility: A Regime-Switching MS-VAR Analysis for Türkiye

Abstract

This study investigates whether monetary policy responses in Türkiye differ across growth volatility regimes and examines the implications for welfare-related macroeconomic stability losses. The analysis uses quarterly data from the first quarter of 2002 to the fourth quarter of 2024 and employs a reduced-form Markov-Switching Vector Autoregressive (MS-VAR) model. Monetary policy is modeled through an extended Taylor rule with regime-dependent reaction coefficients. Model parameters are estimated by maximum likelihood, and regime probabilities are obtained using the Hamilton filter. The regimes are estimated endogenously rather than predetermined based on historical periods. The findings indicate two distinct growth regimes: stability and high volatility. In the high-volatility regime, growth volatility increases and the monetary policy response to inflation weakens, while responses to the exchange rate and real economic indicators strengthen. The welfare analysis shows that welfare losses arising from fluctuations in inflation, output, and unemployment differ across regimes. The findings suggest that monetary policy responses and welfare-related macroeconomic stability outcomes may be sensitive to macroeconomic regime conditions.