The Monetary Base Approach: The Turkish Case

A detailed discussion on the econometric performance of Turkey is presented considering the relevancy of monetary base approach, i.e. the monetary ans interest rate policies, and financial markets and instruments in Turkey. The stability of the multiplier is tested in two seperate notions: that of the short-run predictability and the long-run stability. The parametric components of the money multiplier, i.e. the currency and reserve ratios are further investigated since the test results suggest the existence of an unstable multiplier in Turkey. The long run equilibrium relation between the supply of money, national income, and the rate of inflation is estimated using Engle- Granger two step method to construct the cointegrating relation and to specify the error correction mechanism for the mpney demand function in Turkey. Finally, we report our empirical findings and discuss the policy requirements of an unstable multiplier for Turkish Economy.