The Effects of The Interest Rate Volatility on Turkish Money Demand

Abstract

This study aims to examine, especially the effects of interest rate (time deposit and treasury bills) volatilities on the demand for money in case of Turkey for 1987Turkey for : 1-2007: 3 period. Quarterly data of all variables are used as the research data and Pesaran, Shin and Smith (2001) 's bound test is used as the research method. In computing interest rate volatilities, moving-sample standart deviation method which is proposed by Kenen and Rodrik (1986) and Koray and Lastrapes (1989) is used. According to the results, the long run coefficient of gross domestic product is positive and statistically significant as expected. Although, the volatility of interest rate on treasury bills is positive as expected, it is statistically insignificant. On the other side, the coefficient of volatility of interest rate on time deposit, the coefficient of inflation rate and the coefficient of exchange rate are all negative and statistically significant as expected.Keywords: Money Demand, Bound Test, Interest Rate Volatility IntroductionExamining the determinant of the demand for money is important in order to create and conduct a healthy monetary policy which is closely related to whole economy. For example, a factor that increases the demand for money may adversely affect economic performance by increasing nominal income and velocity of money circulation.This study aims to examine, especially the effects of interest rate volatilities in case of Turkey along with traditional factors affecting the demand for money. Since the increase in interest rate volatility is expected to lead structural changes in the structure of behavioral relations which defines financial sector (Walsh, 1984: 133) it will also greatly affect the demand for money. But, it must be stressed here that the nominal interest rate includes two components: Expected real rate of return and an expected rate of inflation. Since nominal interest rate volatility may reflect the volatility of either one or both of these components, it can be said that the impact of interest rate volatility could have emerged in two-ways. Although, there is a consensus among economists that the volatility of real interest rate increases money demand, the effect of the volatility of inflation is arguable. But, empirical evidences indicate that there is a negative relationship between volatility of inflation and the demand for money. The justification: an increase in the volatility of inflation makes all nominal assets including money riskier to hold since their value in terms of goods and services becomes unpredictable. The greater risk will cause some investors to shift part of their wealth out of nominal assets into tangible assets such as commodity inventories. Therefore, to the extent that volatility of nominal interest rate reflects volatility of inflation, volatility of nominal interest rates could have a negative effect on money demand (Garner, 1986; 30-31). While the theoretical perspectives reveal multifaceted effects, issues relating to empirical studies hav...

The Impacts of Interest Rate and Exchange Rate Volatilities on the Demand for Money in Developing Economies

“…Economic theory indicates that interest rate volatility also increases the demand for money. Any factor that positively affects the demand for money can adversely affect the economy through its negative effect on nominal income (Celikoz & Arslan, 2011).…”

“…A large body of literature exists concerning examining the effect of the interest rate volatility or the exchange rate volatility on money demand. Celikoz and Arslan (2011) studied the relationship between the interest rate volatility and the demand for money for Turkey. Their study showed that the interest rate volatility was not statistically significant and had a positive relationship with the demand for money.…”

Monetary Policy and Exchange Rates Pre- and Post-Global Financial Crisis: The Case of Turkey

“…In this way, the association between monetary policy and the exchange rates is considered an important issue for the literature. Studies in the literature that have examined monetary policy variables and the domestic currency have varied both theoretically and empirically (Akar and Icek, 2015;Saraç and Karagöz;2011, Çeliköz, 2011Shastriet et al, 2013;Sensoy and Sobaci, 2014;Andria et al, 2017). However, few studies have examined the impact of economic crises on the relationship between monetary policy and exchange rates in emerging economies like Turkey, which is considered to be one of the countries that suffered from this crisis (Yuksel, 2016).…”