Application of Khan and Knight's model to Turkish economy for the periods 1964-1980 and 1980-1985

Abstract

The present study is an application to the Turkish economy of a model formulated by Khan M.S. and Knight M.D. where output, prices, international reserves, government spending and expenditures, money, and domestic credits are simultaneously determined. The prediction of these variables are made available through the estimated reduced form of this model. It is observed that only four out of seven equations provide an acceptable error. This can not be interpreted as a brillant fit. The worst results are obtained from the int~rnational reserves equation. Estimation of orice level and real income were succesful since those variables had a predictable trend over time. Nevertheless, the outcomes' of ex-post simulations made available from the reduced form, indicate that obtaining the structural form parameters by a further stage of least squares estimation ca-lead to interesting results. Before going into the mentioned procedure, however, it is essential that the international reserves equation should be examined thoroughly.