Determination of Money Demand Function in Turkey

Determining the factors affecting money demand are very important. Monetary authorities can influence macroeconomic magnitudes by providing control over money balances. In order to make a reliable estimation of money demand firstly one must set the determinants of the money demand and its stability. In this study aimed to determine the money demand function in Turkey using quarterly data including the period 2006-2017. The autoregressive distrubuted lag (ARDL) approach, also known as bound test, was used to determine short and long-term relationships and a long-run cointegrating relationship was found between the variables. According to the findings, the coefficients are statistically significant and coefficient signs are consistent with theory. The long-run income, interest rate and exchange rate elasticities are 0.77, -0.01 and 0.17, respectively. The fact that the exchange rate variable has a positive effect is supported by the literature on wealth effect. The CUSUM and CUSUMSQ tests, which were applied to test the structural stability of the model, demonstrate that the model has stable over long-run. Results show that broad money supply can be used as an effective policy instrument