Is currency seigniorage exogenous for inflation tax in Turkey?

Abstract

This paper discusses the implications of the validity of the conditioning hypothesis for the maintained money demand equation for an inflation tax analysis. We also test the validity of the quantity-theoretical inflation tax model for the post-1980 quarterly Turkish data by using Johansen cointegration techniques. The results suggest that the tax rate (inflation) is weakly exogenous for the parameters of the long-run money demand (tax base) equation. This result, consistent with a Keynesian endogenous seigniorage-exogenous inflation tax rate theory prior, does not support the hypothesis that the Turkish inflation can be explained by the conventional inflation tax revenue-maximizing motive alone.

Modeling Base Money Demand and Inflation for the Turkish Economy

“…In this respect, Alper and Ucer (1998), Akyurek (1999) and Erlat (2001) point out the importance of inflationary stickiness and expectations phenomenon with a long-memory in Turkish inflation rates. Ozmen (1998) and Koru and Ozmen (2003) find that, in the long-run, inflation appears to determine currency growth and that inflation seems not to be the result of an active monetary policy aiming to maximize seigniorage revenues. Neyapti (1998) also emphasizes the importance of inertia phenomenon on the domestic inflationary framework and indicates that targeting net domestic assets in fighting inflation may not be appropriate for the Turkish economy and suggests to use interest rate policy tool for this purpose.…”

A Model of Exchange-Rate-Based Stabilization for Turkey

“…Setting β at 0.25 makes the interest elasticity of money demand 0.56 in the base run which is consistent with the simple average of 0.36 and 0.72. For Turkey, the estimates of inflation elasticity of money demand range from 2.62 to 2.9 (Ozmen, 1998;Selcuk, 2001;Ozdemir and Turner, 2004) that makes interest elasticity of money demand around 2.25 which is unreasonably high.…”