ON THE STABILITY OF THE DEMAND FOR MONEY IN TURKEY: EVIDENCES FROM THE PERIOD 2006-2017

Abstract

This paper aims at analysing whether there is a stable demand for money function for the Turkish economy throughout the period 2006-2017. The distinguished features of the paper over previously published ones related to the Turkish economy are as follows: Firstly, the definitions of the supply for money have been revised since the last month of 2005, and the paper focuses on the new era. Secondly, probably most importantly, some volatility measures, i.e. volatility of interest rate and volatility of exchange rate, are taken into considerations as well as conventional determinants of demand for money, such as real income, interest rate and exchange rate. Performing Bounds Testing methodology, it is determined that there is a stable demand for money function for the Turkish economy. The above-mentioned demand for money is a positive function of real income, exchange rate, and volatility in the exchange market, but negative function of the interest rate. Moreover, it is suggested that the narrow money, i.e. M1, should be considered as a control variable in practising the monetary policy in Turkey. Finally, the exchange market is a crucial importance of designing of monetary policy in Turkey as well.