EGE ACADEMIC REVIEW, vol.15, no.2, pp.239, 2015 (Peer-Reviewed Journal)
This paper examines the aggregate consumption function for Tur- key considering changes in credit regimes. The findings suggest that changes in access to domestic credit substantially affect both short- and long-run dynamics between aggregate consumption and macroeconomic variables. They show that the financial vari- ables have a relatively strong effect on aggregate consumption, and the effect of income on aggregate consumption decreases in the recent period [2003-2013] which is characterized by the loose-credit regime. Furthermore, the results suggest that fluc- tuations in the aggregate consumption are primarily driven by the financial shocks rather than the income shocks during this pe- riod. Overall, with greater access to domestic credit, in the recent decade, the link between aggregate consumption and financial variables strengthens, and thereby the excess sensitivity of ag- gregate consumption to income declines in Turkey. This implies that policy makers should mainly focus on the financial variables to curb the rapid domestic consumption growth.