The relationship between money supply and basic economic indicators: the case of Turkiye

The aim of this study is to analyze the relationships between money supply and key macroeconomic indicators in Turkiye. The data employed in the analysis consist of quarterly time series spanning the period from 2005: Q4 to 2024: Q4, obtained from the Electronic Data Delivery System (EVDS) of the Central Bank of the Republic of Turkey, TradingView, and the World Bank Group. The dependent variable in the study is the money supply (M2), while the independent variables include the inflation rate, interest rate, exchange rate, and foreign direct investment (FDI). In the analytical process, unit root tests were first applied to determine the stationarity properties of the time series. Subsequently, appropriate lag lengths were selected based on the Akaike Information Criterion (AIC) to define the model's temporal structure. The existence of a long-term relationship among the variables was examined using the Bounds Test within the framework of the ARDL (Autoregressive Distributed Lag) model, revealing evidence of cointegration. Following the estimation of long-term coefficients, an Error Correction Model (ECM) was constructed to illustrate how short-term deviations adjust toward the long-term equilibrium. The model's performance and reliability were further assessed through Jarque-Bera normality tests on the residuals, the Breusch-Godfrey autocorrelation test, and Breusch-Pagan-Godfrey heteroskedasticity tests. Additionally, the structural stability of the model was evaluated using the CUSUM test. The findings indicate significant relationships between money supply and key macroeconomic indicators in Turkey. Exchange rate shocks exert positive short-term effects on the money supply, which, however, diminish over time. Lagged values of interest rates have a restrictive impact on money supply, while inflation exhibits a positive effect in the short term but a limiting role in the long term. Foreign direct investments show no significant short-term impact, although they may play a more decisive role over the long term. In conclusion, changes in money supply are shown to play a determining role on Turkey's key economic indicators and constitute a critical factor for the effectiveness of monetary policy. Keywords: Money supply, Macroeconomic indicators, ARDL model