Post Keynesian economics argue that money supply grows endogenously through bank credit to private sector. In this study, this argument is examined for the Turkish economy and the relationship between bank credit to private sector and broad money is analyzed with cointegration and vector error-correction models. The expected results were found between M2, M3, M3A and bank loans; however, the relationship could not be established between bank loans and M2Y, L0 which include foreign exchange deposits. It is known that the volume of foreign exchange deposits is affected by currency substitution. However, these deposits are included into broad money in Turkish Lira terms, and it is observed that changes in exchange rate can alter the volume of these deposits, and consequently, the volumes of M2Y and L0. Therefore, a proxy for currency substitution and exchange rate are included to former models, and cointegration and vector error-correction models are reestimated. The findings are in accordance with the argument that money supply grows endogenously with bank credit.
Key words: Post-Keynesian economics, money supply, bank credit, currency substitution. JEL Classification: E12, E40, E51. Article Language: EnglishTurkish
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