Income velocity of money and an application on Turkish economy

The income velocity of money refers to how many times money passes from one holder to the next to form the current income. Therefore, it is an important indicator to demonstrate the relation between the money stock and income stream. As the direct control is not possible, impact of velocity of circulation can be realized after determining the variables affecting it. Being aware of such factors is also crucial for determining the economy policy. The velocity of money, which has been in discussion since 1600s, is asserted to be formed by a set of corporate factors with very low velocity of change and agreed to have a stable structure. The velocity of circulation treated as a function of national income and rate of interest within the framework of the traditional approaches started to be investigated in detail as a consequence of the volatility in time and it was asserted that the recent financial innovations in the world have a part in emergence of such volatility. Moreover, it is argued that the currency substitution seen in the countries other than the capitalist developed countries impacts the demand to the national currency and becomes determinative on the velocity of money. In this study focusing on Turkey, the long term relation of money with the relevant variables was tested by Johansen Cointegration Test, considering that the income velocity of money is affected both from the traditional factors such as national income and interest rate and modern factors such as financial innovations and the fact of currency substitution. It was observed at the end of the study that the velocity of circulation goes in the same direction with the traditional variables such as income and rate of interest in the long term. Exchange rate variable added to the model to represent the currency substitution also goes parallel and this condition signs that currency substitution exists. And it was concluded that the variable of total trading volume with credit cards, which indicates the financial innovations, reverses the velocity of circulation. Keywords: Money demand, income velocity of money, financial innovations, money substitution, Johansen cointegration analysis.