The effect of money supply, exchange rate, and GDP on inflation in the Turkish economy for the period (1980-2017)

Abstract

The study aims to try to identify the effect of both the money supply, exchange rate and GDP on the inflation rate in the Turkish economy during the period 1980-2017. To achieve this the inflation rate and the money supply were chosen in the broad concept represented by the money supply and the Turkish lira exchange rate against the US dollar represented by the exchange rate and the values of the GDP. The variables were subjected to a test of them first: the unit root (stability). Secondly: joint integration tests according to the (Bounds Test Approach method) and the (Johannes-Gillis test). Third: the self-regression vector test for the distributed slowdown. Fourth: The error correction estimation limit model. Fifth: The causal relationship tests (Granger causality). The study found that both the money supply and the foreign exchange rate have a significant positive effect on the inflation rate in the short term with a one-way causal relationship from the money supply to the inflation rate. It mean, an increase in the money supply leads to an increase in inflation rates and this corresponds to the economic theory as well as a reciprocal relationship between the GDP and the money supply. Which indicates that an increase in the rates of local production increases the speed of currency circulation and the growth of cash balances in the country and consequently an increase in the money supply.