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

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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