Do Credits Affect Money Supply and Deposits, or Vice Versa, or Interconnected?

Abstract

There are different approaches regarding the effect of credits on deposits and money supply. In particular, the view that banks do not need deposits to create credit has become increasingly popular. In this paper we empirically investigate the relationship among money supply, credits and deposits based on the Turkish experience. Specifically, using quarterly observations on M1, M2, M3, deposits in Turkish Lira (TL-Lira) and Foreign Currency (FX) deposits as well as credits spanning the December 2005 - September 2021 period we find that credits have significant effects on money stock and deposits. However, our results also suggest that credits are not the most important determinant of money supply or deposits. While our results suggest that credits may generate money and deposits endogenously, this finding does not imply that money is purely an endogenous variable.