Cicilia Meifani Jennifer W Muhammad Bahuri

Banking and Finance 4

Money, Inflation and Growth Relationship: The

Turkish Case
Cuma BOZKURT
Department of Economics,The Faculty of Economics and Administrative
Sciences, Gaziantep University

1. Variable (based on the journal)

A variable is defined as anything that has a quantity or quality that varies.

The dependent variable is the variable a researcher is interested in. The
changes to the dependent variable are what the researcher is trying to
measure with all their fancy techniques. For example, the dependent variables
are real income and money supply can affect money demand. Where
independent variable is, a variable believed to affect the dependent variable.
For example, the relationship between inflation and growth are based on
money supply and money demand.

2. Data and How to Run the Data (tools)

Data are the original sources or material that you have created or collated to
conduct your research project. They can be digital or non-digital. In this
journal, the writer used the data money supply, deflator, income and velocity
of money data from 1922.2 – 2012.2. The data were obtained from Turkish
Statistical Institute (TUIK) and Central Bank of the Republic of Turkey
(TCMB). Tools are research materials that are necessary to perform
research. All inventions, discoveries and knowledge can become research
tools. The writer used equation of Quantity Theory of Money for calculating
the Velocity of Money.

3. Problem and Question

Problem is the purpose of making a journal. By knowing the problem, the

writer will ask question to fulfill the data of the purpose. As an example, the
purpose in this journal is to know how do money, inflation, and growth
relationship can
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affect each other. The reader will know and understand the relation between
money supply and money demand that actually affecting each other.

4. Objective

Generally, research objective focus on the way to measure variables, such as

identify or describe them. Sometime objectives are directed towards
identifying the relationship or the difference between 2 variables. Objective
should be close to the statement of the problem. There are 2 types of
research objectives, general objectives and specific objectives. General or
secondary objectives provide a detailed view of the aims of the study. They
provide a general overview of the study usually, there is one general
objective in each study. The specific or broad objectives define what is the
main aim of the study. There can be many specific objectives because every
“what”, “where” and “how” of the research should be provided in the specific
objectives. The specific objective is the essence of the study and it gives the
main idea since they provide focus to the study. Based on the journal, Money,
Inflation and Growth Relationship: The Turkish Case and considering some of
research objectives: What is the relationship of money, inflation and growth in
turkey? What happen to the inflation and growth if the money is unstable?

5. Theory use in the journal

The writer used Quantity Theory of Money, Quantity theory of money states
that money supply and price level in an economy are in direct proportion to
one another. When there is a change in the supply of money, there is a
proportional change in the price level and vice-versa.
It is supported and calculated by using the Fisher Equation on Quantity
Theory of Money.

M*V= P*T where,

M = Money supply

V = Velocity of money

P = Price level

T = volume of the transactions

Based on the journal, Velocity of money is calculated using equation of

Quantity Theory of Money. According to Quantity Theory of Money, real
economic activity model requires that monetary balances and price level,
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which is controlled by nominal money supply must be kept at a certain level.

Concerning the nominal money supply, which is determined monetary
authorities externally, price level equals the purchasing power of money
supply to the required level of reel balances. If money supply deviates from
the level of real balances, central bank will intervene in the situation. After
this, price level must be entirely flexible, and determined by nominal money
supply only externally.

6. Methodology

The methods section describes actions to be taken to investigate a research

problem and the rationale for the application of specific procedures or
techniques used to identify, select, process, and analyze information applied
to understanding the problem, thereby, allowing the reader to critically
evaluate

a study’s overall validity and reliability. A methodology does not set out to
provide solutions, it is, therefore, not the same as a method. Instead, a
methodology offers the theoretical underpinning for understanding which
method, set of methods, or best practice can be applied to a specific case, for
example, to calculate a specific result. Based on this journal, the research
approach the writer used is a quantitative approach, which emphasizes
descriptive explanation of the problem under investigation. For instance, the
money supply determined outside the system as exogenous. Equation can be
written into price equation as; P=MV/Y, taking log of the equation; LogP =
logM + logV – logY, by differentiation of this equation for inflation; gp = gm +
gv – gy. This equation indicates the price increase (inflation rate), which is
determined by the increase in cash flowrate and net income.

7. Result
This paper examines money, inflation and growth relationship in Turkey by
using cointegration test. For this purpose, 1999.2 – 2012.2 period is taken and
quarterly data of money supply (M2), GDP, velocity of money and deflator are
used. According to the results from this paper, money supply and velocity of
money is a main determinant of inflation in the long run in Turkey. On the
other hand, 1% decreases in income directly reduces inflation by 1%.

The integration analysis of variables was examined using of ADF

(Augmented Dickey–Fuller test) unit root test. The optimal lags for unit root
tests are to include lags sufficient to remove any serial correlation in the
residuals. The optimal lags for unit root tests are determined according to the
Schwarz Criterion. Results from the ADF unit root tests are presented in Table
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2. These results show that the null hypothesis of a unit root in each time
series were

failed to reject at 5 percent significance level but strongly rejected at their first
difference. This implies that all variables are non-stationary at levels but
stationary at the first differences.

The results from JJ cointegration tests indicate that there is a unique long-
term or equilibrium relationship between variables. Both trace statistics and λ-
max statistics show that there exist two cointegrating vectors at 5%
significance level (see Table 3). The long-run and short-run coefficients are
obtained from VEC model. The long-run coefficients for the variables Y is
negative and variables M and V are positive. The long-run coefficients are
strongly statistically significant in all models. In addition, the estimated ect are
presented that their coefficients are negative and statistically significant. ect
indicate that any deviation from the long-run equilibrium of between variables
is corrected about 35.6 % for each period and takes about 3 periods to return
the long-run equilibrium level (see Table 3).
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Impulse-response analysis employed the response to Cholesky one standard

deviation innovations. An impulse response function traces the effect of a
one-time shock to one of the innovations on current and future values of the
endogenous variables. While the responses of prices (deflator) to itself, real
money supply and velocity are positive, to real GDP is negative (see Figure
1). On the other hand, the variance decomposition provides information about
the relative importance of each random innovation in affecting the variables in
the VAR. The variance decomposition analysis show the variation in inflation
arise about %10 from itself, about %10 from real money supply, about %10
from real GDP and about %70 from velocity (see Figure 2).
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8. Conclusion

According to my findings the increases in the money supply and velocity of

money causes inflation in the long run. This result is similar to result of
McCandless and Weber (1995). Also, this result seems to be consistent with
findings of Rolnick and Weber (1998) who provided empirical evidence that
there is a high correlation between money supply and inflation. According to
Dwyer and Hafer (1998), an increase in the growth rate of money causes an
equal increase in the rate of inflation. Therefore, my result at the same time is
similar to result of Dwyer and Hafer (1998). This also shows that money
supply is the main determinant of inflation.

Although inflation, which increased up to the levels of 30% after 2001 crisis,
was reduced to 6.2% in 2012, this decline couldn't be sustained, and
increased to 7.4% in 2013. This increase was significantly influenced by the
rapid increase of money supply in 2013 (While M2 money supply was 743
Billion TL in 2012, this amount was 879 Billion TL in 2013), approximately
20% devaluation of TL as a result of the increase in the exchange rates, and
increase in food prices. The fact that we have elections in near future,
increase in public expenditures, which has become a tradition for the period
before elections, and the expectation that these increases will be over inflation
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level indicate that TRCB (TWO Rivers Bancorp) will probably not be able to
achieve 5.3%, which is the inflation level for 2014, or even 6.6% estimation,
which was announced for this target afterwards.

9. Recommendation

In order to prevent inflation and deficit, Turkey must adopt a growing policy, in
which turkey can replace the commodities dependency to foreign markets in
energy sector can't prevent the increase in current account deficit, and
becoming a country, which gives weight to importation instead of domestic
production. It is essential that inflation is reduced to the levels of 2-3%. When
monetary policy is remains incapable of combating against inflation, the
process must be supported with financial policy and spending policy. Turkey
must plan and implement the structural arrangements, which will decrease
dependence on foreign market in terms of financing needs in the short-term,
and eliminate this dependence in the long term.

10. Opinion

This paper is talk about Money, Inflation and Growth Relationship In turkey.
The effect of money supply and velocity of money to the inflation and the
effect to growth. In my opinion this paper tells us much about relation between
money and inflation, but they do not explain more about growth.