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Modeling the Demand for Currency Issued in Turkey

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  • Ozge Akinci

Abstract

The purpose of this study is to investigate the empirical relationship between real money balances, real income, and the opportunity cost variables in Turkey using quarterly data between the periods 1987Q1-2003Q3. The estimation results reveal that long run demand for real cash balances depends on real income, interest rate on government securities and the exchange rate. The long run elasticity of income is close to one with the opportunity cost variables carrying the expected signs. Based on the cointegration and the weak exogeneity test results, single equation error correction model is specified and estimated. The estimated models disclose the fact that the income and the interest rate effects is much smaller in the short run than the long run, whereas exchange rate influence is more pronounced in the short run.

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File URL: http://www.tcmb.gov.tr/research/cbreview/jan03-1.pdf
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Bibliographic Info

Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 3 (2003)
Issue (Month): 1 ()
Pages: 1-25

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Handle: RePEc:tcb:cebare:v:3:y:2003:i:1:p:1-25

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Keywords: Money Demand; Cointegration; Error Correction Modelling;

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References

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  1. Jean-Claude Nachega, 2001. "A Cointegration Analysis of Broad Money Demand in Cameroon," IMF Working Papers 01/26, International Monetary Fund.
  2. Sunil Sharma & Neil R. Ericsson, 1998. "Broad money demand and financial liberalization in Greece," Empirical Economics, Springer, Springer, vol. 23(3), pages 417-436.
  3. Heller, H Robert & Khan, Mohsin S, 1979. "The Demand for Money and the Term Structure of Interest Rates," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(1), pages 109-29, February.
  4. Defne Mutluer & Yasemin Barlas, 2002. "Modeling the Turkish Broad Money Demand," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(2), pages 55-75.
  5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774501, October.
  7. Choudhry, Taufiq, 1995. "High inflation rates and the long-run money demand function: Evidence from cointegration tests," Journal of Macroeconomics, Elsevier, Elsevier, vol. 17(1), pages 77-91.
  8. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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Citations

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Cited by:
  1. Levent, Korap, 2007. "Turkish money demand, revisited: some implications for inflation and currency substitution under structural breaks," MPRA Paper 19479, University Library of Munich, Germany.
  2. Levent KORAP & Metin YILDIRIM, 2012. "Testing the Lucas Critique for the Turkish Money Demand Function," Iktisat Isletme ve Finans, Bilgesel Yayincilik, Bilgesel Yayincilik, vol. 27(318), pages 57-82.
  3. Levent, Korap, 2008. "Modeling Turkish M2 broad money demand: a portfolio-based approach using implications for monetary policy," MPRA Paper 19703, University Library of Munich, Germany.

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