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Endogeneity of Money Supply: Evidence from Turkey

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  • Oguzhan Cepni

    (Central Bank of the Republic of Turkey Head Office)

  • Ibrahim Ethem Guney

    (Central Bank of the Republic of Turkey Head Office)

Abstract

There is a long discussion among academics and central bankers about the theories of money supply. According to the exogenous view, central banks have the full control over money supply via policy actions including the adjustments of interest rates and reserve ratios, both of which alter commercial banks’ lending decisions. However, the theory of endogenous money supply emphasizes the role of demand for bank loans in money creation. More specifically, banks create money by meeting the demand of economic agents. In this study, we investigate which of the money supply theories holds in Turkish economy for the period 2006-2015 by employing cointegration and causality tests. Our findings show that the causality runs from bank loans to moneysupply both in the short and long terms, which supports the endogenous view in a sense that central bank and the banks fully meet the total demand for money in Turkish economy.

Suggested Citation

  • Oguzhan Cepni & Ibrahim Ethem Guney, 2017. "Endogeneity of Money Supply: Evidence from Turkey," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 6(1), pages 01-10, January.
    • Handle: RePEc:rbs:ijfbss:v:6:y:2017:i:1:p:01-10
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