Impact of Liquidity on Speculative Pressure in the Exchange Market
AbstractEconomies are susceptible to speculative attacks regardless of whether they use fixed or floating exchange rates. Turkish experience in the last two decades constitutes one of the most prominent examples proving this verdict. It is widely accepted that narrow money (M1) is the most conventional measure of liquidity, excessive growth of which may fuel speculative attacks on the currency. The literature on currency crises clearly lacks a country-specific study that addresses the long-run relationship between this indicator and the speculative pressure in the exchange market. This article aims at filling this gap in the literature using monthly Turkish time series data spanning the period 1984:04- 2006:11. Results of the ADF unit root tests suggest that the series are stationary. Hence, no-cointegration analysis was carried out before the Granger-causality tests. Granger causality tests reveal strong evidence supporting univariate causality running from narrow money (M1) to exchange market pressure. This outcome lends empirical support to the Turkish policy makers’ current efforts to maintain a tight control of the money supply.
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Bibliographic InfoPaper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2006_24.
Date of creation: Dec 2006
Date of revision: Dec 2006
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Speculative attacks; currency crises; domestic credit.;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-22 (All new papers)
- NEP-CBA-2006-12-22 (Central Banking)
- NEP-CFN-2006-12-22 (Corporate Finance)
- NEP-CWA-2006-12-22 (Central & Western Asia)
- NEP-MAC-2006-12-22 (Macroeconomics)
- NEP-MON-2006-12-22 (Monetary Economics)
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