How Stable is the Money Demand Function in Turkey

The paper attempts to test the stability of money demand relations for four money aggregates in Turkey. The paper uses the Johansen multivariate cointegration analysis over the data covering the period, 1990:01-2005:12. The findings indicate that there is a stationary long-run relationship between the different monetary aggregates, real income, domestic interest rates, foreign interest rates, and the real effective exchange rate. However, CUSUM and CUSUMQ stability tests showed that M1 and M2Y money demand functions are stable while M2 and M3 money demand functions are not stable over the period under consideration. The results show that the level of real income, domestic interest rate and real effective exchange rate play a significant role in determining the money demand.