The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) Atilla Cifter and Alper Ozun Abstract This study aimed to test the money base, money supply, credit capacity, industrial production index, interest rates, inflation and real exchange rate data of Turkey during the years 1997 – 2006. These were tested through the monetary transmission mecha- nism and passive money hypothesis, using the vector error correction model-based causality test. Empirical findings showed that the passive money supply hypothesis of the new Keynesian economy is supported in part by accommodationalist views and differs from those of structuralist and liquidity preference theories. However, the monetary transmission mechanism has established that long-term money supply only affects general price levels, while production is influenced by interest rates in the new period of the Turkish economy. Empirical findings show that in this new period, interest transmission mechanisms are at the forefront. JEL: E58, E52, E4, C32 DOI: 10.2478/v10033-007-0011-3 1. Introduction Though advocating similar theories in the use of monetary the correlation between money, credit, interest, inflation and politics, the New Keynesian and the Monetarist Schools differed exchange rates can be tested through long-term analysis. The in their opinions on whether money is active or passive. While econometric methods in long-term analysis are a causality test the Monetarist School defends the fact that monetary tools, based on the vector error correction model for cointegrated i.e., money supply, is under the control of the Central Bank, the data or the Granger causality tests for non-cointegrated data. New Keynesian School argues that, as credit control is not tied During this study, together with the vector error correction to the Central Bank, it does not completely control money sup- method and the Granger causality test, the monetary transmis- ply. Defenders of the New Keynesian School put forward the sion mechanism and monetary passivity hypothesis were test- following evidence in support of these claims (Seyrek and oth- ed. The second section surveys pertinent literature, the third ers, 2004): (1) The statistical stochastic aspect in money data section outlines the methodology, the fourth section concerns and the great errors that result from it determine that money empirical findings, and the fifth section presents the results. is passive; (2) According to general econometric tests, money stock is passive; (3) The passivity of monetary stock derives *Cifter: PhD Candidate, Econometrics, from the macroeconomic character of the banking system; Marmara University, Istanbul, Turkey, and Financial Reporting (4) The passivity of money stock can be explained with many Vice President, Deniz Invest-Dexia Group, Istanbul, Turkey, macroeconomic variables. In addition to credit-money sup- [email protected] ply, whether money is active or passive is also based on the correlation between money, interest, inflation and productiv- *Alper : PhD, Inspector, Market Risk ity. During this process in the new economic period, exchange Group, Is Bank, Istanbul, Turkey, rates also have their place. The New Keynesian view describing [email protected] 15 April 2007 The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) 2. Literature Review and Theory Multipliers (according to M1, M2 andM3) and credit data. Nell (2000-01) examined the relationships between money supply, There are three main types of monetary transmission money circulation speed and credit using the vector error cor- mechanism models found in the literature: the interest rate rection model for South Africa from 1966 – 1997 and found channel, the asset channel and the credit channel (Seyrek and that all new Keynesian approaches (structuralist, accommoda- others, 2004). According to the monetary transmission mecha- tionalist and liquid preference theories) were empirically valid. nism, money supply is active and, in the short term, monetary tools and increased money supply reduce interest rates. Hence the liquidity effect is only short-term. The drop in interest rates LM2 LMB increases credit value. This situation causes a short-term in- (Money (Monetary Supply) crease in income. In the long term, the increased price in mon- Base) Li (Interest ey supply increases its general level and the real value of money Rates) stock declines. According to the Monetarist approach, money LL supply is active during these processes and is controlled by the (Credits) LIP Central Bank. According to the Keynesian approach, monetary (Industrial politics tools affect the monetary base first, then the money Prod.Ind) Lexch supply. Following this, the changes in money supply affect (RealExch. LUFE interest rates, which in turn affect investments and then rev- Rate) (Inflation) enues. New Keynesian economics argues that money supply is passive*. Rather than the Central Banks’ exported money sup- Graph1. MonetaryTransmissionMechanism ply, credit money is determined according to the banks’ credit preferences. When economic units use credit, deposits created by credit multiply. The passive money hypothesis presumes LMB LM2 that causality moves away from credits towards deposits. Cred- (Monetary (Money it demands are set by the preferences of the credit applicants Base) Supply) atosrintvohdel e omcrvsro,ee 2rdn 0ceit0ryoe3 rsd.)t .io t FsTco,kh ar;e natrhdceci staoh rrmeee ramteshfooorendree,a , Ct amieopnonptnarroleaiasyl tc B,s hstaoetnrscuk kswcs t diu(tSohrha nrlaiesongttm a ahrnudadg vt aeloinq c puaoanidnsd--- Moore(1989) Palley(1Po9ll9i6n,(1199998)1,) Palley(1996,19H9o8w),ellPsol(liM1on9o(9r1e6()91991)89) Moore(P1a9l8le9y)(1996,1998)(,PInollidnL(u1I9sP9t1r)ial ity preference. According to the accommodationalists (Moree, LL Prod.Ind) (Credits) 1989) credits are the source of money supply and money base, and that money supply and money revenue (GDP) are coin- Graph2. tegrated and interdependent. According to the structuralists EndogenityofMoneyinNewKeynesianEconomy (Palley, 1996, 1998; Pollin 1991) credits are the source of money Shanmugan, Nair and Li (2003), examined the re- supply, money base and money multipliers and that money lationship between money base, money supply, credit and supply and money revenue (GDP) are cointegrated and inter- the industrial production index using the vector error correc- dependent. Finally, according to liquidity preference theorists tion model and Granger causality test in Malaysia from 1985 (Howells, 1995), credits and money supply are cointegrated – 2000 and reached conclusions that support the findings of and interdependent. The monetary transmission mechanism accommodationalists and liquid preference theorists. Lavoie is shown in Diagram No.1 and the New Keynesian Economical (2005) tested the passivity of money according to theoretical Passive Money Theory is shown in Diagram No. 2. In the new and empirical literature for Canada and the USA, and reached economic period, real exchange rates will also be distinct from conclusions that support accommodationalist views. Ahmad general price levels. and Ahmet (2006) carried out short and long-term tests on the For the New Keynesian economy, the first empirical passivity of money supply for Pakistan from 1980 – 2003 using study on passive money was carried out by Pollin (1991). Pol- the Granger causality test. In the short term, they found that lin (1991), obtained data supporting structuralist views for the empirical findings supported structuralist and liquidity prefer- USA from 1953 – 1988. Vera (2001), obtained findings to sup- ence theory, but in the long term found that the money base port accommodationalist and structuralist views for Spain from * The critical evaluation of New Keynesian monetary 1987 – 1998 by applying Granger causality tests using Money politics. See Cottrell (1994). 16 SEE Journal The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) set the credit capacity and showed that the Pakistan Central Product (GDP) was published every three months, the Produc- Bank became active in setting money supply.Gunduz (2001) tion Index (PI) was used instead. Because the treasury bond and Seyrek, Duman and Sarikaya (2004) carried out studies interest rates indicator was not available on a monthly basis on Turkish data. Seyrek and others (2004) found that data for before 2002, the 12 month deposit interest rate was used in- Turkey from 1968 – 1996 supported the Keynesian transmis- stead. During analyses made for Turkey, IPI was used instead sion mechanism multi-monetarist hypothesis driven by credit. of GNP for national growth and production indicators and de- Gunduz (2001) analysed the monthly macroeconomic data posit interest rates were used instead of treasury bond interest dependent VAR (Vector Autoregressive) model and the bank rates. Money Base, Money Supply, Credit Capacity, Industrial lending channel roles in Turkey. The findings for the period Production Index, Interest Rates and Real Exchange Rates were 1986 – 1998 show that the bank lending channel presented obtained from www.tcmb.gov.tr and inflation rates from www. limited support for the transmission mechanism. tuik.gov.tr. Money Base reserves and total Free Market Proce- dures (FMP) debts have been calculated by the authors. Table 1 shows the unit root tests for the chosen indicators. All se- ries were proven (90%-100%) to contain unit roots. In order 3. Data and Methodology to separate the series from unit roots, logarithmic differences 3.a.Data have been taken and it has been established that all series are stationary in terms of entry level logarithmic differences (Table Monthly data was used between January 1997 – June 2). 2006 for the monetary transmission mechanism and passive money supply test. Due to the fact that the Gross Domestic Augmented Jarque-Bera La Skewness Kurtosis Dickey-FullerTest* statistic R 4 1.35825{<1.00} 0.625191 0.625191 8.95215 E 3 1.70072{<1.00} 0.855461 2.56205 14.8155 MB 1 1.59344{<1.00} 0.884356 2.84869 14.9684 M1 3 1.80713{<1.00} 0.863718 2.61482 14.8789 M2 3 1.08533{<1.00} 0.844484 2.68744 14.014 M2Y 3 1.02843{<1.00} 0.395414 1.99569 7.76173 M3 4 0.86340{<1.00} 0.847275 2.67047 14.1555 M3Y 2 1.31943{<1.00} 0.422493 2.02084 7.94562 L 3 1.58811{<1.00} 1.29503 3.86689 35.4344 Exc 1 -2.6588{<1.00} 0.398535 2.33168 5.13939 IP 1 -1.5450{<0.90} 0.600842 2.68881 7.31921 I 3 -1.3675{<0.90} 0.178638 1.864 6.73618 UFE 1 0.32292{<0.99} 0.101448 1.40765 12.2396 R:ReserveMoney,E:Emission,MB:MonetaryBase,L:CreditCapacity,Exc:Realexchangerate_MPI, IP:IndustrialProductionIndex,i:Interestrate_12Month,MPI:ManufacturerPriceIndex: *Laglengthshavebeenidentifiedas12maximumaccordingtoSchwartzKnowledgeCriteria. Valuesinsidebracketsarethe rejectedunitrootstatistics.aLaglength. Definitions: ReserveMoney=Emission+BankMandatoryPayments+BankUnboundOpportunities+FundCalculations+NonBankRelatedDeposits MonetaryBase=ReserveMoney+OpenMarketActivityDebts Ml=MoneyinCirculation+CurrentDepositsatDepositaryBanks+CentralBankDeposits M2=Ml+FixedTermDepositsatDepositaryBanks M2Y=M2+ForeignCurrencyDepositAccounts(TL) 113 Table1. LevelSeries,UnitRootTestsandDistributionSpecifications 17 April 2007 The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) LMB LM2 LL LIP LI LEXC LUFE Mean 0.0347 0.0364 0.0336 0.0045 -0.0112 0.0022 0.0275 Mode 0.0377 0.0315 0.0358 0.0045 -0.0050 0.0053 0.0259 Max 0.3384 0.1497 0.1531 0.2238 0.7186 0.1363 0.1341 Min -0.2467 -0.0532 -0.0772 -0.2209 -0.5579 -0.1577 -0.0228 Std.Deviation 0.1026 0.0347 0.0336 0.0810 0.1275 0.0394 0.0236 Multiplier -0.1429 0.5159 -0.3160 0.1102 1.1458 -0.6521 0.8737 Oblateness 4.0410 3.9321 4.9116 3.7338 16.609 6.7538 5.7567 J-B 5.4877 9.1042 19.088 2.7642 896.78 74.355 50.159 Probability 0.0643 0.0105 0.0000 0.2510 0.0000 0.0000 0.0000 Observations 113 113 113 113 113 113 113 Table2 LogarithmicDifferenceSeriesFundamentalStatisticalSpecifications 3.b.Methodology The vector error correction model-based causality test and Fuller (1981) and is used together with Equation No. 1: has been selected for the Passive Money Hypothesis test and m the transmission mechanism, which in turn is derived from (cid:6)Y (cid:3)(cid:10) (cid:5)(cid:10) t(cid:5)(cid:9)Y (cid:5)(cid:8) (cid:2)(cid:6)Y (cid:5)(cid:7) t 1 2 t(cid:4)1 i t(cid:4)i t Money Base, Money Supply, Credit Capacity, Industrial Produc- i(cid:3)1 (1) tion Index, Interest Rates, Inflation and Real Exchange Rates. Before the vector error correction model is applied, it must be ΔY is the first difference in testing the stability of the variable, researched as to whether or not the series contain unit roots. t t the trend variable and is the lag difference term. The ‘i’ lag In the literature, unit root-stability identification is generally difference term is added sufficiently for the error term to be a made by using ADF (Augmented Dickey Fuller Test) and P-P non-correlation series using knowledge criteria. (Philips-Perron) tests. The ADF test was developed by Dickey 0.150 LLXLm2 Splinek=10.00 0.125 0.100 0.075 0.050 0.025 0.000 -0.025 -0.050 -0.075 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 Graph3 M2andCreditsScatterDiagram(Logdifferencedseries) 18 SEE Journal The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) LMB Lm2 0.25 0.10 0.00 0.00 2000 2005 2000 2005 0.2 LL 0.1 Lexc 0.1 0.0 0.0 -0.1 22000000 22000055 2000 2005 LIP LI 0.2 0.5 0.0 0.0 -0.2 -0.5 2000 2005 2000 2005 0.15 LUFE 0.10 0.05 0.00 2000 2005 Graph4 Series Another main unit root test used in the literature is the “Phil- (cid:13) (cid:3)(cid:4)T(cid:2)k In(1(cid:4)(cid:13)_ ),r(cid:3)0,1,2,3,....,n(cid:4)1 trace(r) i lips-Peron” (P-P) test developed by Phillips-Perron (1988). The i(cid:3)r(cid:5)1 (4) P-P test can be applied using Equation No. 2 (cid:6)Y (cid:3)a(cid:5)cY (cid:5)d(cid:6)Y (cid:5)d (cid:6)Y (cid:5)........(cid:5)d (cid:6)Y (cid:5)(cid:7) t t(cid:4)1 1 t(cid:4)1 2 t(cid:4)2 p(cid:4)1 t(cid:4)p(cid:4)1 t _ (cid:13) (cid:3)(cid:4)TIn(1(cid:4)(cid:13) ) max(r,r(cid:5)1) r(cid:5)1 (2) (5) ΔY is the primary difference of Y series, a,c,d,d,.....d the pa- t 1 2 p-1 In the prepared model, if cointegration can be identified rameters, t is time, p the lag number and ε shows error term. t between dependent and independent variables, then it can H:c=0 shows that the series is not stationary, H:c=/0 shows 0 1 be understood that there is at least one aspect of causality that the series is stationary. (Granger, 1969). If there is no cointegration between variables, the standard causality test (Granger, 1969) can be applied; and Before examining the relationship of data that that is not if there is cointegration between variables, then causality can stationary but at the same level, the series need to be exam- be examined using the vector error correction model (VECM) ined to determine whether or not they are integrated. Johan- (Granger, 1988). Engle and Granger (1987) developed the sen(1988), Johansen and Joselius (1990) developed the Johan- VECM, which is shown in the equation below (6). sen cointegration test, which is used widely in the literature. In the following model, a non-trend setting and non-re- n n n (cid:6)y (cid:3)(cid:8) (cid:5)(cid:2)(cid:8) (cid:6)y (cid:5)(cid:2)(cid:8) (cid:6)(cid:14) (cid:5)(cid:2)(cid:8) EC (cid:5)(cid:7) strictive cointegration test containing a stationary term has t 0 1i t(cid:4)i 2i t(cid:4)i 3 t(cid:4)n i i(cid:3)1 i(cid:3)1 i(cid:3)1 been preferred (3) (6) H*(r):(cid:12)y (cid:5)Bx (cid:3)(cid:8)((cid:10)'y )(cid:5)(cid:11) 1 t(cid:4)1 t t(cid:4)1 0 The short term causality relationship in the VECM can be tested (3) using the significance of the parameters and the Wald test. The In the Johansen method the cointegration among non-station- long-term causality relationship can be tested using the ECt-n ary series are identified using trace and maximum eigenvalue parameter significance (Shanmugan and others, 2003). statistics (4-5) 19 April 2007 The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) 4. Empirical Findings La H λ Stat λ Stat o Trace Max Table No.3 shows the ADF and P-P unit root test results of r=0 28.5057{<0.01}* 16.3041{<0.05} the logarithmic difference series. All series are stationary to a LM2&LI 4 r<=1 12.2016{<0.025} 12.2016{<0.025} 99% level of significance, r=0 55.9499{<0.01}* 43.3068{<0.01}* LM2&LIP 4 r<=1 12.6431{<0.025} 12.6431{<0.025} ADFTest P-PTest Variables La t-statistic t-statistic r=0 26.8229{<0.01}* 21.0262{<0.01}* LM2&LUFE 4 LMB 0 -16.0154{<0.01} -16.5017{<0.01} r<=1 5.79668{<0.5} 5.79668{<0.5} LM2 2 -4.11103{<0.01} -10.6736{<0.01} r=0 45.6645{<0.01}* 31.1411{<0.01}* LM2&LExc 4 r<=1 14.5233{<0.01} 14.5233{<0.01} LL 2 -4.32343{<0.01} -9.62207{<0.01} r=0 25.0972{<0.01}* 14.9121{<0.1} Lexc 1 -6.99893{<0.01} -6.85118{<0.01} ML2&LL 4 r<=1 10.1851{<0.05} 10.1851{<0.05} LIP 4 -8.85429{<0.01} -16.5786{<0.01} r=0 75.0987{<0.01}* 57.0977{<0.01}* Lİ 2 -5.17817{<0.01} -12.6571{<0.01} LI&LIP 4 r<=1 18.001{<0.01} 18.001{<0.01} LUFE 0 -4.14952{<0.01} -4.27729{<0.01} r=0 63.2395{<0.01}* 56.6974{<0.01}* MB:MonetaryBase,L:CreditCapacity,Exc:RealExchangeRate_MPI, LIP&LUFE 4 IP:IndustrialProductionIndex,i:Interestrate_12Month, r<=1 6.54211{<0.2} 6.54211{<0.2} MPI:ManufacturerPriceIndex *DLagshavebeenidentifiedas12maximumaccordingtoSchwartz r=0 38.3893{<0.01}* 32.3643{<0.01}* KnowledgeCriteria. Valuesinsidebracketsaretherejectedunitroot LUFE&LExc 4 statistics.aLag length. r<=1 6.02494{<0.2} 6.02494{<0.2} r=0 40.4699{<0.01}* 30.6964{<0.01}* Table3 LExc&LL 4 ADFandP-PUnitRootTests(Logarithmicdifferencehasbeentaken)* r<=1 9.77352{<0.05} 9.77352{<0.05} The unrestrictive Johansen cointegration tests demonstrating Valuesinsidebracketsaresignificancevalues. Lagshavebeenidentified as12maximumaccordingtoSchwartzKnowledgeCriteria. the passive money hypothesis and the monetary transmission *HypothesisofH0isrejectedat%1significance.aLaglength. mechanism test can be found in Table Nos. 4 and 5. All series Table5. UnrestrictedJohansenCointegrationTest are cointegrated at a secure level of 95-99%. Due to the fact (MonetaryTransmissionMechanism) that the series are all cointegrated, the vector error correction The causality between credit-monetary base, credit-monetary model-based causality test has been applied to all hypotheses. base-IP, credit-money supply and credit-money supply-IP for the passive money test was examined using the vector error La H λ Stat λ Stat o Trace Max correction model (Table No.6). The results show that there is r=0 45.0642{<0.01}* 34.9867{<0.01}* causality towards credit=>Monetary Base and Credit=>Money LMB&LL 4 r<=1 10.0775{<0.05} 10.0775{<0.05} Supply. This situation supports in part the views of the accom- modationalists in the new Keynesian approach (this is sup- r=0 25.0972{<0.01}* 14.9121{<0.1} LM2&LL 4 ported completely because there was no Money Supply=>IP r<=1 10.1851{<0.05} 10.1851{<0.05} causality found). Table No.8 shows the monetary transmission r=0 55.9499{<0.01}* 43.3068{<0.01}* LM2&LIP 4 r<=1 12.6431{<0.025} 12.6431{<0.025} r=0 57.3502{<0.01}* 49.0907{<0.01}* LM2 0.27 LMS&LIP 4 (Money Li r<=1 8.25947{<0.1} 8.25947{<0.1} (Interest Supply) Rates) r=0 93.6593{<0.01}* 53.529{<0.01}* 46 -0.17 LMB&LL&LIP 4 r<=1 40.1302{<0.01}* 30.7801{<0.01}* 0. r<=2 9.35016{<0.05} 9.35016{<0.05} LIP LM2&LL&LIP 4 rr<==01 226.36.4549328{<{0<.00.2015}}* 401.39.4282442{<{<00.0.12}}* (CreLdLits) -0.15 1.03 0.39 (PInrdouds.Itnrdia)l r<=2 9.42012{<0.05} 9.42012{<0.05} Lexch -0.32 Valuesinsidebracketsaresignificancevalues. Lagshavebeenidentified (RealExch. -0,96 LUFE as12maximumaccordingtoSchwartzKnowledgeCriteria. Rate) (Inflation) *HypothesisofH0isrejectedat%1significance.aLaglength. Table4 Graph5. UnrestrictedJohansenCointegrationTest (EndogeneityofMoneyHypothesis) MonetaryTransmissionMechanism(Turkey) 20 SEE Journal The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) Short-term Long-term Short-term Long-term VECM VECM Effect Effects Effect Effects Waldtest: EC Short-term Long-term Waldtest: EC Short-term Long-term t-1 t-1 DEPANDENT DEPANDENT Var:LMB Var:LM2 7.31782 0.276316 8.28649 0.853448 Lİ Lİ=>Lm2 Lİ=>Lm2 LL LL=>LMB LL=>LMB [0.0068]* [0.008]* [0.0040]* [0.005]* DEPANDENT 8.77713 0.861413 Var:LI LLLL LL=>LMB [0.0124]** [0.006]* LL,LIP 0.0034883 0.0426212 LM2 LM2=>LI LM2=>LI 0.192875 =>LMB [0.9529] [0.953] LIP LL=>LMB [0.457] DEPANDENT Var:LIP DEPANDENT 2.31045 -0.366596 Var:LM2 LM2 LM2=>LIPLM2=>LIP [0.1285] [0.131] 4.25987 0.462158 LL LL=>Lm2 LL=>Lm2 DEPANDENT [0.0390]* [0.041]* Var:LUFE 3.93154 0.419147 LM2 17.9812 1.03013 LM2=> LM2=> LLLL LL=>LM2 [0.0000]** [0.000]* LUFE LUFE [0.1400] [0.097]** LL,LIP DEPANDENT 0.244108 =>LMB Var:LM2 LIP LL=>LM2 [0.318] 0.0030329 -0.0135914 LExc=> LExc=> Lexc DEPANDENT [0.9561] [0.956] LM2 Lm2 Var:LL DEPANDENT Var:LExc 0.0020319 0.0099965 LMB [0.9640] [0.964] LMB=>LL LMB=>LL LM2 1.12743 -0.248525 LM2=> LM2=> [0.2883] [0.291] Lexc Lexc 2.42909 0.432127 LM2 LM2=>LL LM2=>LL DEPANDENT [0.1191] [0.122] Var:LM2 1.8055 0.0057303 4.25987 0.462158 LL LL=>LM2 LL=>LM2 LLMLB LMB=>LL [0.0390]** [0.041]* [0.4055] [0.981] LMB,LIP 0.391690 =>LL DEPANDENT Var:LL LIP LIP=>LL [0.211] 2.42909 0.432127 Lm2 LM2=>LL LM2=>LL 3.14705 0.511034 [0.1191] [0.122] LLLM2 LM2=>LL [0.2073] [0.081]** LM2,LIP DEPANDENT Var:LIP 0.120232 =>LL LIP LIP=>LL 4.76484 -0.174685 [0.602] LI Lİ=>LIP Lİ=>LIP [0.0290]** [0.031]* DEPANDENT DEPANDENT Var:LIP Var:LIP 2.31045 -0.366596 0.606543 -0.167911 Lm2 LM2=>LIP LM2=>LIP LUFE LUFE=>LIPLUFE=>LIP [0.1285] [0.131] [0.4361] [0.438] *%1,**%5significantlevelofacceptancerespectively. DEPANDENT Valuesinsidebracketsaret-stats.Laglengthisdeterminedas4. Var:LUFE 5.00403 -0.967069 Lexc=> Lexc=> Table6. Lexc [0.0253]* [ 0.027]* LUFE LUFE CausalityTestsBasedonVectorErrorCorrectionModel EndogeneityofMoney DEPANDENT Var:LL mechanism vector error correction model test. According to 0.929813 -0.281147 LExc=> LExc=> Lexc Table No.8, long-term causalities can be found in Diagram No.5. [0.3349] [0.337] LL LL Eight causality directions were identified: Credits=>Money DEPANDENT Var:LUFEL Supply, Interest Rates=>Money Supply, Interest Rates=>Real 4.33088 0.390938 Lİ=> Lİ=> Exchange Rates (negative), Interest Rates=>Inflation, Interest LI [0.0374]** [0.040]* LUFE LUFE Rates=>IP (negative), Money Supply=>Inflation, Real Exchange *%1,**%5significancelevelofacceptancerespectively. Rates=>Inflation, Inflation=>IP (negative). These results show Valuesinsidebracketsaret-stats.Laglengthisdeterminedas4. that money supply is the cause of inflation in the long term Table7. CausalityTestsBasedonVectorErrorCorrectionModel- (influence factor 1.03), that credits affect money supply (influ- MonetaryTransmissionMechanism 21 April 2007 The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) ence factor 0.46), that money supply does not affect inflation one reason for this situation. Another reason is that in the new rates but that interest rates affect money supply (influence economic period factors influenced the real economic activity factor 0.27) and that real exchange rates affect inflation in a through credits (consumer credits, business credits and credit negative and dominant way (influence factor -0.96). Also, it cards) and interest rates. Diagram No.6 shows the difference in has been found that IP is affected by interest rates but not af- correlation between money supply and IP and Diagram No.7 fected by money supply. This situation conforms neither to shows the difference in correlation between money supply the monetary school nor the new Keynesian school views. The and credits. Because correlation is also under the influence of Central Bank’s choice of interest rates as the main indicator and cyclic effects, causality was tested with the vector error correc- means of identifying net internal assets after the 2001 crisis is tion model. 1.2 Correl(LM2,LIP) 0.25 LIP 1.0 0.2 Poly.(Correl(LM2,LIP)) 0.8 Poly.(LIP) 0.15 0.6 0.1 0.4 0.05 0.2 0.00 0.0 -0.05 10 20 30 40 50 60 70 80 90 100 110 -0.2 -0.1 -0.4 -0.15 -0.6 -0.2 -0.8 -0.25 Graph6. DynamicCorrelation(LM2,LIP,4Lags) 1.2 Correl(LM2,LL) Poly.(Correl(LM2,LL)) 1.0 0.8 0.6 0.4 0.2 10 20 30 40 50 60 70 80 90 100 110 120 130 -0.2 -0.4 -0.6 -0.8 Graph7. DynamicCorrelation(LM2,LL,4Lags) 22 SEE Journal The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) 5. Concluding Remarks References Ahmad, N., ve Ahmet F. (2006), “The Long-run and Short- This study was conducted to test the money base, money run Endogeneity of Money Supply in Pakistan: An Empirical supply, credit capacity, industrial production index, interest Investigation”, State Bank of Pakistan-Research Bulletin, Vol. 2, rates, inflation and real exchange rate data of Turkey during the No. 1 years 1997 – 2006. These were tested through the monetary Cottrell, A. (1994). “Post Keynesian Monetary Economics: A transmission mechanism and passive money hypothesis using critical survey.” Cambridge Journal of Economics, 18(6), ss.587- the vector error correction model-based causality test. Empiri- 605. cal findings show that the passive money supply hypothesis of the new Keynesian economy is supported in part by accom- Dickey, D. A. ve Fuller, W. A. (1981), “Likelihood Ratio Statistics for an Autoregressive Time Series with a Unit Root”, modationalist views, and do not conform to the structuralist Econometrica, 49, ss.1057-72. and liquidity preference theories. However, according to the monetary transmission mechanism, it has been established Engle, R.F. ve Granger, C.W.J. (1987), “Co-integration and that long-term money supply only affects general price lev- Error Correction: Representation, Estimation and Testing”, Econometrica, 55(2), ss.251-276 els, and that production is influenced by interest rates in the new economic period. Empirical findings show that in the Granger, C.W.J. (1969), “Investigating Causal Relationship new economy, period interest transmission mechanisms are by Econometric Models and Cross Special Methods.” Economet- brought to the forefront. During the monetary transmission rica, 37(3), ss.425-435. mechanism test, it was decided to leave in theforefront. During Granger, C.W.J. (1988), “Some Recent Developments in a the monetary transmission mechanism test, it was decided to Concept of Causality”, Journal of Econometrics, 39, ss.199-211 leave in the Markov regime variant, which takes into account Gündüz, L. (2001), “Türkiye’de Parasal Aktarım Mekanizması cyclic effects, a vector error correction model proposed for fu- ve Banka Kredi Kanalı.” İMKB Dergisi(ISE Review), Sayı. 18 ture studies Howells, P.G.A. (1995). “The Demand for Endogenous Mon- ey.” Journal of Post Keynesian Economics, 18(1), ss.89-106. Johansen, S. ve Juselius, K. (1990), “Maximum Likelihood Estimation and Inference on Cointegration- with Application to the Demand for Money”, Oxford Bulletin of Economics and Sta- tistics, 52, ss.169-210 Johansen, S. (1988), “Statistical analysis of cointegration vec- tors”, Journal of Economic Dynamic and Control, 12, ss. 231- 254 Lavoie, M. (2005). “Monetary base endogeneity and the new procedures of the asset-based Canadian and American monetary systems.” Journal of Post Keynesian Economics, 27, 4: 689-709. Moore, B.J. (1989). “The Endogeneity of Credit Money.” Review of Political Economy, 1, 1: 64-93. Nell, K.S. (2000-01). “The Endogenous/Exogenous Nature of South Africa’s Money Supply under Direct and Indirect Mon- etary Control Measures.” Journal of Post Keynesian Economics, 23(2), ss.313-329. Palley, T.I. (1991). “The Endogenous Money Supply: Con- sensus and Disagreement.” Journal of Post Keynesian Economics, 13(3), ss.397-403. ——— (1996). “Accommodationism versus Structuralism: Time for an Accommodation.” Journal of Post Keynesian Eco- nomics, 18(4), ss.585-594. ——— (1998). “Accommodationism, Structuralism and Su- perstructuralism.” Journal of Post Keynesian Economics, 21(1), ss.171-173. 23 April 2007 The Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) Philips, P.C.B. ve Perron, P. (1988), “Testing for a Unit Root in Time Series Regression”, Biometrica, 75, ss.335-446 Pollin, R. (1991). “Two Theories of Money Supply Endo- geneity: Some Empirical Evidence.” Journal of Post Keynesian Economics, 13(3), ss.366-396. Seyrek, İ., Duman, M., ve Sarıkaya, M. (2004), “Para- sal Aktarım Mekanizması ve Para Politikası Aracı: Türkiye’de Aktarım Mekanizması”, C.Ü. Iktisadi İdari Bilimler Dergisi, Cilt 5, Sayı 1 (in Turkish) Shanmugam, B., M. Nair, and O.W. Li (2003). “The En- dogenous Money Hypothesis: Empirical Evidence from Malay- sia (1985-2000)”. Journal of Post Keynesian Economics, 25(4), ss.599-611. Vera, A.P. (2001). “The Endogenous money hypothesis: some evidence from Spain (1987-1998).” Journal of Post Keynesian Economics, 23, 3: 509-526 24 SEE Journal