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The demand for money in Turkey and currency substitution

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  • Mohsen Bahmani-Oskooee
  • Muge Karacal

Abstract

Over the last three decades, the Turkish economy has experienced severe macro-shocks, among which depreciation of the Turkish lira is the most noticeable one. The Turkish lira (TL) has depreciated from 13 TL per US dollar in 1973 to more than 1.5 million TL per dollar today. It is expected that because of these shocks, some of the macro-relationships could suffer from structural instability which makes policy formulation and predictions difficult. This paper considers the demand for money in Turkey. To take account of currency substitution, the demand for money that includes the exchange rate in addition to income, interest rate and inflation rate is estimated. After incorporating the CUSUM and CUSUMSQ tests in bounds testing approach for cointegration, it is shown that in Turkey for a successful and effective monetary policy, the monetary authorities would rather concentrate on M1 because not only is it cointegrated with its determinants and it is stable, all four determinants belong to the cointegrating space.

Suggested Citation

  • Mohsen Bahmani-Oskooee & Muge Karacal, 2006. "The demand for money in Turkey and currency substitution," Applied Economics Letters, Taylor & Francis Journals, vol. 13(10), pages 635-642.
  • Handle: RePEc:taf:apeclt:v:13:y:2006:i:10:p:635-642
    DOI: 10.1080/13504850500358819
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    References listed on IDEAS

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    1. Ozatay, Fatih, 1997. "Sustainability of fiscal deficits, monetary policy, and inflation stabilization: The case of Turkey," Journal of Policy Modeling, Elsevier, vol. 19(6), pages 661-681, December.
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    9. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 313-334, June.
    10. Mohsen Bahmani-Oskooee & Miquel-Angel Galindo Martin & Farhang Niroomand, 1998. "Exchange rate sensitivity of the demand for money in Spain," Applied Economics, Taylor & Francis Journals, vol. 30(5), pages 607-612.
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    Citations

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    Cited by:

    1. Sahar Bahmani, 2008. "Stability of the Demand for Money in the Middle East," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(1), pages 62-83, January.
    2. Korap, Levent, 2008. "Determinants of reserve money demand: a multivariate co-integrating approach," MPRA Paper 25525, University Library of Munich, Germany.
    3. Cem Saatçioðlu & Levent Korap, 2007. "Turkish Money Demand, Revisited: Some Implications For Inflation And Currency Substitution Under Structural Breaks," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 21(1+2), pages 107-124.
    4. Levent KORAP & Metin YILDIRIM, 2012. "Testing the Lucas Critique for the Turkish Money Demand Function," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 27(318), pages 57-82.
    5. Sahar Bahmani, 2008. "Stability of the Demand for Money in the Middle East," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(1), pages 62-83, January.
    6. Korap, Levent, 2010. "Testing homogeneity for real income and prices in a money demand equation: the case of Turkey," MPRA Paper 30086, University Library of Munich, Germany.
    7. Akhand Akhtar Hossain, 2015. "Central Banking and Monetary Policy in Muslim-Majority Countries," Books, Edward Elgar Publishing, number 14612.

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