CPI, MONEY SUPPLY AND EXCHANGE RATE DYNAMICS IN TURKEY: A VECM APPROACH

Year 2018, Volume: 5 Issue: 3, 249 - 260, 30.09.2018

Onur Sunal

Abstract

Purpose- The
aim of this study is to outline the relationship between The Consumer Price
Index (CPI), Money Supply (M3) and The Exchange Rates (EXC) in Turkey.

Methodology- The
data were gathered from The Turkish Statistical Instittute and The Central Bank
which covers the monthly period between 2005/1 and 2017/12 and were taken on
their own levels where an error correction model was utilized to reveal both
the long and short run relationships.

Findings- The
results revealed that 100 billion TL rise in M3 is accompanied by 19 points
increase in the CPI and 1TL depreciation of local currency (appreciation of $)
leads to 82.9 points upswing in CPI.

Conclusion- The Cointegrating equation revealed
that there was a significant long-run relationship between CPI, Money Supply
and Exchange Rates. Moreover changes in M3 and
EXC together cause changes in CPI at .10 significance level. Money Supply
endogeneity was also observed at the 10 level.

Keywords

Inflation, money supply, exchange rates, error correction model, Turkey

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