Dynamic Analysis of Money Demand Function in Turkey

Abstract

In this paper, the dynamic determinants of money demand function and the long-run and short-run relationships between money demand, real product and nominal interest rates are examined in Turkey for the time period 1980-2012. In particular we estimate a dynamic specification of a long money demand function based on Keynesian liquidity preference theory to ascertain the relevant elasticity of money demand using DOLS and FMOLS methods. The empirical results of the study show that in Turkey inflation, exchange rates and money demand are co-integrated, i.e., they converge to a long run equilibrium point. In this regard, correction procedure corrects nearly 31 percent of the biases from long run equilibrium in one year. Therefore, the real money demand in Turkey is positively related with income and negatively related with nominal interest rates.