OPTIMAL POLICY INSTRUMENT SELECTION IN MONETARY POLICY: ENDOGENEITY OF MONEY SUPPLY

Year 2017, Volume: 6 Issue: 2, 61 - 69, 30.06.2017

Ahmet Incekara Akmyrat Amanov

https://doi.org/10.17261/Pressacademia.2017.495

Abstract

Purpose- Nowadays,
the central bank's primary objective is price stability which is defined as low
and stable inflation. The central bank has to fulfill some institutional and
operational conditions to achieve this goal. One of the operational conditions
is the selection of the appropriate policy instrument to implement the monetary
policy. The central bank can choose interest rate or monetary base as policy
instrument. The main question of this paper is whether the monetary base the
optimal instrument. The choice of monetary base as a policy instrument is
dependent on the exogeneity of money supply, which means that the money supply
is controllable by monetary base.  Methodology- This paper investigates
endogeneity of money supply of Turkey for a sample period of 1990-2016 using
Johansen cointegration test. 

Findings- As a
research method, the Johansen cointegration test and VECM is used to show
long-run relationships and causality between variables and Granger causality
test is used to examine short-run causality between the variables. 

Conclusion-  It is seen that CBRT has very limited control
over money supply, thus monetary base may not be optimal policy instrument to
ensure price stability.   

Keywords

Endogenous Money Supply, Johansen Cointegration Test, Monetary Base, Monetary Policy Instrument

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