Causal Relationship between Money and Inflation during a High Inflation Period: The Case of Turkey

Abstract

This paper reexamines the causal relationship between money supply and inflation in the context of Turkish economy. Co integration and Error Correction models are applied to monthly data covering the period 1970-1996. Most previous studies on the relationship between money and prices estimate a bivariate model raising the possibility of omitted variable bias. The present paper overcomes this problem by using both bivariate and multivariate models. In contrast to most previous studies on Turkey, the present study finds a feedback relationship between money supply and inflation. However, the causality from inflation to money supply is much stronger than the causality from money supply to inflation both in the bivariate and multivariate model. In order to provide more light on the money-price nexus and to see if the empirical results are sensitive to the series used, the causal relationship is also investigated by using the price level measured by the CPI. It is found that there is one-way causality from money supply to price level in the bivariate model and feedback relationship in the multivariate model.

The Causation between Inflation and Currency Devaluation: The Case of Iran

“…Likewise, David and Oluseyi (2017) estimated a significant relationship between currency devaluation and real GDP growth, and between currency devaluation and external debt, but insignificant relationship between currency devaluation and private domestic investment in Nigeria. Gocmen (2016) found a feedback relationship between money supply growth and inflation in Turkey. However, causality from inflation to money supply growth was stronger than causality from money supply growth to inflation.…”