Endogeneity analysis of money supply in Turkey

With the globalization process, monetary policies have gained significant importance in ensuring stability in macroeconomic indicators, which have increasingly been influenced by external dynamics. Meanwhile, the Post-Keynesian endogenous money supply approach has brought orthodox monetary policy practices—based on managing the money supply—under scrutiny. Accordingly, current debates on the endogeneity of money supply have become highly relevant to the effectiveness of monetary policy. In this context, our study investigates the nature of money supply endogeneity in Turkey and, based on this analysis, evaluates the effectiveness of orthodox monetary policy instruments. The endogeneity of money supply in Turkey is examined through the causal relationships between credit volume, total deposits, and various monetary aggregates. For this purpose, quarterly data from the period 2010:Q1 to 2024:Q4 are analyzed using the Vector Error Correction Model (VECM)-based Granger causality test. Within this framework, the bidirectional interaction between total deposits and monetary aggregates—namely M0, M2, M2Y, M3, and M3Y—and total credit volume is explored. The empirical results predominantly reveal a causality from monetary aggregates and deposit volume toward total credit volume, both in the short and long run. These findings thus provide strong evidence, contrary to the Post-Keynesian thesis of endogenous money supply, that money supply in Turkey is exogenously determined. The exogenous determination of money supply in Turkey implies that, from a policy perspective, the Central Bank of the Republic of Turkey (CBRT) is not constrained by the limitations set forth within the Post-Keynesian framework of endogenous money. Within this framework, policies aimed at managing deposit volume and the quantity of money in circulation may be adopted to achieve macroeconomic goals, particularly price stability. Consequently, the principles developed under the orthodox view of exogenous money supply offer valuable instruments for the CBRT in designing effective monetary policies.