Examination of money supply endogeneity in Turkey: Evidence from asymmetric causality test

Figures & data

Table 1. Unit root test results

	ADF	PP
	t-Statistic	t-Statistic
M2	−2.361[12]	−2.624
ΔM2	−3.227[12]*	−9.148***
BL	−2.397[3]	−1.517
ΔBL	−8.018[0]***	−8.064***

*** denotes significance at 1% level. For the case with constant, critical values for ADF test are −3.51, −2.89, −2.58 for 1 %, 5 %, and 10 % significance levels, respectively. For the case with constant and trend, critical values for ADF test are −4.06, −3.45, and −3.15 for 1 %, 5 %, and 10 % significance levels, respectively. The critical values for the ADF t-statistics are from the (Mackinnon, 1996) table. The critical values for the Phillips–Perron test are the same as those for the augmented Dickey–Fuller Test. The numbers in the parentheses of ADF are appropriate lag lengths selected by SIC. Max lag length is set to 12.

Table 2. Johansen cointegration test results

Test			Critical value
		10%	5%	1%
${\lambda }_{\mathrm{t}\mathrm{r}\mathrm{a}\mathrm{c}\mathrm{e}}$
$\mathrm{r}=1$	0.119	2.706	3.841	6.635
$\mathrm{r}=0$	33.208***	13.429	15.495	19.937
${\lambda }_{\mathrm{m}\mathrm{a}\mathrm{x}}$
$\mathrm{r}\le 1$	0.119	2.706	3.841	6.635
$\mathrm{r}=0$	33.089***	12.297	14.265	18.520

Notes: ***,**, and * denote significance at 1%, 5%, and 10% level. Max lag length is set to 12 and lag length is determined to be 2 according to AIC.

Table 3. Results of vector error correction models

	M2		BL
Item	Estimate	t-stat	Estimate	t-stat
$\theta$	0.008	2.773***	0.018	5.518***
${\alpha }_1$	−0.350	−2.377**	0.034	0.206
${\alpha }_2$	−0.164	−1.1497	0.084	0.530
${\beta }_1$	0.429	3.256***	0.095	0.650
${\beta }_2$	0.136	0.993	−0.088	−0.583
δ	−0.003	−1.930*	0.005	2.894***
${\mathrm{R}}^2$	0.126	_	0.158	_
$\mathrm{A}\mathrm{I}\mathrm{C}$	−6.045	_	−5.839	_
$\mathrm{S}\mathrm{I}\mathrm{C}$	−5.871	_	−5.665	_
$SC\mathrm{\_}LM$	3.779 [0.151]	_	2.18[0.336]	_
$\mathrm{B}\mathrm{P}\mathrm{G}$	4.337[0.631]	_	6.004[0.423]	_
$J-B$	1.366[0.505]	_	1.541[0.463]	_
${\mathrm{H}}_1:{\alpha }_1={\alpha }_2=0$	_	_	0.285[0.867]	_
${\mathrm{H}}_2:{\beta }_1={\beta }_2=0$	10.943[0.004]	_	_	_

Notes: ***, **, and * denote significance at 10%, 5%, and 1% level. The numbers in the brackets are p-values. AIC: Akaike Information Criteria, SIC: Schwarz Information Criteria, SC_LM: Serial Correlation LM test statistic (Chi square-stat), BPG: Breusch Pagan Godfrey Heterosticedasticity test statistic(${\chi }^2$—stat). The lag length of 2 is determined using AIC. ${\mathrm{H}}_1:$ BL does not Granger cause M2 in the short-run, ${\mathrm{H}}_2:$ M2 does not Granger cause BL in the short-run.

Table 4. Toda and Yamomoto Granger non-causality test

Null Hypothesis	MWALD ${\chi }^2$ Test Statistic
BL ≠> M2	10.831***
M2 ≠> BL	0.342
Notes: *** denotes significance at 10% level. The denotation BL ≠> M2 means that variable BL does not Granger cause M2. Maximum lag is set to 12.

Table 5. Diagnostic and specification test results for the VAR model

Variables in the VAR model	Multivariate normality	Multivariate ARCH
(M2,BL)	0.000	0.014
(M2+,BL+)	0.000	0.041
(M2-,BL-)	0.827	0.155
(M2+,BL-)	0.157	0.153
(M2-,BL+)	0.009	0.0162
Notes: The provided values are p-values for multivariate normality and multivariate ARCH tests. The optimal lag order in the VAR model is one and was selected based on the minimization of the HJC information criterion. Maximum lag length is set to 12. The (Doornik & Hansen, 2008) statistic is applied to test the null hypothesis of multivariate normality. A test provided by (Scott Hacker & Hatemi-J *, 2005) was implemented for the multivariate ARCH effects using the statistical software produced by Hacker and Hatemi-J. The number of bootstrap simulations is set to 10,000.

Table 6. Asymmetric causality test results

Null Hypothesis	MWALD Test Value	Critical Value
		1%	5%	10%
BL ≠> M2	8.860***	7.336	4.082	2.82
M2 ≠> BL	0.021	7.224	4.187	2.89
BL+ ≠> M2+	12.441***	7.053	3.989	2.806
M2+ ≠> BL+	0.171	7.2	3.967	2.782
BL- ≠> M2-	0.145	12.164	4.688	2.388
M2- ≠> BL-	0.021	15.414	5.565	2.759
BL+ ≠> M2-	0.208	7.271	3.947	2.766
M2- ≠> BL+	2.379	7.732	4.131	2.89
BL- ≠> M2+	3.627	6.474	3.703	2.64
M2+ ≠> BL-	0.049	7.052	3.877	2.74
Notes: *** and ** denote significance at 1% and 5%. The denotation BL ≠> M2 means that variable BL does not cause M2. CV stands for critical value. The optimal lag order in the VAR model is one and was selected based on the minimization of the HJC information criterion. Maximum lag length is set to 12. The critical values are bootstrapped critical values. The number of bootstrap simulations is set to 10,000.

Appendix.A1. Empirical literature on money supply endogeneity

Author(s)/Publication Year	Data Period and Frequency	Econometric Method(s)	Variables Included in the Model	Empirical Results
(Howells & Hussein, 1998)	Quarterly, 1957(1) to 1992(4): Canada, Italy, Japan, and the USA. 1969(1) to 1992(4) Germany. 1977(4) to 1992(4): UK. 1975(1) to 1993(4): France	Cointegration, Granger Causality	Broad measures of money and the lending counterparts. M2 (Canada, Italy, and USA); M3 (Germany, France, and Japan). UK M4 (UK),	For G7 economies money is endogenous.
(Panagopoulos & Spiliotis, 1998)	Quarterly: 1971Q1 to 1993Q2	Engle and Granger and Johansen cointegration Error Correction model	The actual nominal stock of bank lending to IHT firms	Supports the accommodationist view. Credit money was primarily determined by the banking system in response to the demand for loans in Greece
(Günal, 1999)	1987–1997	Johansen Cointegration	The bank loans granted to the private and the public sector, the various money supply definitions	Money supply is endogenous in Turkey
(Işık, 2000)	Quarterly:1987Q1-1999Q4	VAR, Granger Causality	Total loans, monetary base and money multiplier	Supports the structural endogeneity approach.
(Nell, 2000)	Quarterly: 1966Q1-1997Q4	Granger causality, ARDL, Johansen cointegration, Error correction mechanism	Total bank credits, monetary base (currency and reserves held by commercial banks), M3, money multiplier, money income (nominal GDP)	Showed that all three theoretical views were empirically present in South Africa for the period 1987–1998.
(Vera, 2001)	Monthly: 1987:01–1998:10	Granger causality, the autoregressive distributed lag model	Monetary base, M1 money multiplier (M1/B), M2 money multiplier (M2/B), M3 money multiplier (M3/B), loans (L)	Money supply is credit driven. Bank lending causes money supply and money is endogenous in Spain.
(Karaduman, 2003)	Quarterly: 1987–2002	Granger Causality	Bank loans, money supply, monetary base	Money supply is endogenous in Turkey
(Shanmugam, Nair, & Li, 2003)	Quarterly: 1985Q1 to 2000Q4	Granger Causality, Cointegration, Error Correction Mechanism	Total commercial bank loans, monetary base, M3 money supply, M3 money multiplier, nominal GNP (money income)	Money supply is endogenous in Malaysia
(Seyrek et al., 2004)	1968–1996	SEM based exogeneity test	Money supply, total credits, interest rates, price changes and changes in GNP	Money supply is exogenous in Turkey
(Panagopoulos & Spiliotis, 2006)	Monthly: 1975.01–1998.02	VAR, Granger Causality	Industrial production index, the high powered money (monetary base, MB), the narrow money (M1) and two broad money variables (M3, M4).	Money in Greece is endogenously determined. M3 and M4 Granger cause MB.
(Cifter & Ozun, 2007)	Monthly: 1997.01–2006.06	The vector error correction model based causality test	Reserve Money, Emission, Monetary Base, Credit Capacity, Real exchange rate, Industrial Production Index, Interest, Manufacturer Price Index	Central Bank and the banks could fully accommodate the demand for loans. However, the nature of money supply in Turkey could change significantly in the last decade with the unconventional monetary policy tools.
(Tokucu, 2008)	Quarterly: 1987:1–2005:4	VAR analysis	Credits granted to private sector, money supply, monetary base	There is a causality relation from the loans to the money supply. It suggests that the money supply is endogenous in Turkey.
(Işık & Kahyaoğlu, 2009)	Quarterly: 1987:1–2007:3	VAR analysis	Credit stock of the banking sector, monetary base	In Turkey money is perfectly endogenous
(Rachma, 2010)	Monthly: 1997.05–2010.06	VAR, Granger Causality	Base money, narrow money, broad money supply, consumer price index, industrial price index	Money supply is endogenous in Indonesia
(Özgür, 2011)	Quarterly:1987Q1-2009Q2	Cointegration, Vector error correction model(VECM)	Bank loans granted to private sector, broad money supply (M2, M3, M3A, M2Y ve L0)	There is a long-run relationship between loans and M2, M3, M3A. However, there is no relationship between M2Y and L0.
(Haghighat, 2011)	Annual: 1968–2009	Johansen cointegration tests, vector error-correction models (VECM) and Granger causality tests	Bank credit, monetary base, money supply and income	The empirical result is strongly consistent with a post-Keynesian hypothesis that indicates the money supply is endogenous.
(Haghighat, 2012)	1999:02 to 2010:12, logarithmic, Euro area	Vector Autoregression models (VAR) with Granger causality procedure to analyze non-cointegrated series and Vector Error Correction models (VECM) for cointegrated series.	The variables are: loans (L), M1 money supply (M1 t), M2 money supply (M2 t c), M3 money supply (M3 ) and monetary base (BM t). 2 Following Vera (2001), I decompose money supply into monetary base (BM) and money multipliers (M1_B, M2_B, M3_B). This helps testing the significance of liability management as a source of loan demand accommodation.	The cointegration analyses reveal a bidirectional causality between loans and M1 both in the short and long run, whereas loans cause variations in the M2 mainly in the short run. However, according to Granger causality test there is a one-way causality from loans to M3 but not from loans to industrial production index. The results are confirmed by adjusting the loans series for securitization activity in the Euro Area and partially support the accommodationist view.
(Schady, 2012)	Quarterly: 2000Q1 to 2010Q4	Johansen cointegration, Vector Error Correction Models (VECMs) and Granger causality	Monetary base, domestic credit extension, M3, and gross national product.	Causality between loans and M1 both in the short and long run, whereas loans cause variations in the M2. Money supply is endogenous in South Africa
(Tas & Togay, 2012)	Monthly, quarterly and annual data.	A direct test(IV method) for endogenous money theory along, granger causality	Nominal gross domestic product, Monetary base, Reserve money, Narrow and broad money aggregates (M1 and M2), Total bank credit, Money multipliers (M1 = M1/MB, MM2 = M2/MB).	Granger causality test results showed that money is endogenous for all GCC countries except Bahrain and Kuwait.
(Badarudin, Ariff, & Khalid, 2013)	Quarterly	Cointegration, vector error-correction models (VECM) and Granger causality	Monetary base, bank loans, money supply, money multiplier, deposits, income.	According to Granger causality test there is a one-way causality. Money supply is endogenous.
(Bozoklu, 2013)	Quarterly: 1987Q1 to 2011Q2	Granger non-causality based on VAR model	The real gross domestic product, the broad money supply, the three months deposit rate as short-term interest rate, and the consumer price index.	There is causality running from loans to M3 but not from loans to industrial production index.
(Luo, 2013)	Quarterly: 1982Q1 to 2012Q4,	Granger causality, VECM, and the Trivariate VAR	Deposits, loans, real national income, broad money supply, money base	In four countries: Brazil, China, Russia (the period of 2004–2012) and South Africa (1982–1993), money supply is endogenous. In India and Russia (the period of 1982–2003) money supply was found to be exogenous, i.e. money supply cause bank loans.
(Chigbu & Okorontah, 2013)	Annual: 1970–2008	Two stage least square, Johansen cointegration Granger causality	Money supply, value of money, bank rate (rate of interest), real income, liquidity ratio	The findings show that there exists a long-run relationship between money supply and the included variables. The real interest rate and real income Granger cause the growth of money. Moreover, Granger’s causal relation between them was unidirectional from real interest rate, real income to money supply. Money supply is endogenous with respect to the value of money, real income and real interest rate meaning that the monetary policy had influence to some extent on money supply but economic activities had greater influence in determining the rate of money growth.
(Nayan, Kadir, Yusof, Azillah, & Ali, 2015)	Panel data of 177 countries from year 1970–2011	Dynamic panel data analysis, System GMM	Money supply, real GDP per capita, domestic credit inflation.	Money supply is endogenous as proposed by Post Keynesian theorists.
(Nishiyama, 2014)	Quarterly:1984Q1-2000Q3	Granger causality	Nonborrowed reserves, the sum of n largest New York banks’ transaction deposits, demand deposits plus other checkable deposits, The sum of quarterly transaction deposits.	Supports the accommodationist view of endogeneity.
(Aktakas, Akın, & Uçan, 2015)	Quarterly: 1987Q1-2011Q1	VECM	Money supply (M2), private sector credits, private sector investment	The findings are consistent with thePost-Keynesian institutionalist approach.
(Almutair, 2015)	1997.01–2015.02	The study uses Johansen cointegration technique and Vector ErrorCorrection models (VECM) for cointegrated series.	Money supply in the form of M1 and M2, and demand deposit (DD), total deposit (TD) and bank loans (BL)	The long-run causality was found to run from bank loans and from demand deposit to the money supply (MS1), and not from MS1 to BL, as the mainstream view. The endogenious money supply hypothesis is reinforced by the long-run causality running from BL to TD. For MS2, the study verifies a long-run causality running from BL and TD to MS2. Therefore, the money supply of Saudi Arabia whether using MS1 or MS2 is endogenous in the long run. The result of short-run causality with regard of MS1 using Wald Test does not confirm money supply endogeneity in the short run. Short-run causality using Granger with regard to MS2 assures short-run causality running from TD and BL to MS2. In the long run money supply is endogenous whereas monetary authority has some influence on MS1 in the short run.
(Kingdom & Elhendawy, 2016)	Annual: 1990–2014	VECM	Money supply, domestic credit (%of GDP), total deposits in local currency, consumer price index.	There is a positive long-run relationship between domestic credit, Inflation and money supply, and there is a negative long-run relationship between Deposits and money supply. The causal relationship results refer to, there is a causal relationship from the domestic credit to deposits, monetary base and the money supply in two lag, Which indicates that the money supply in Egypt is endogenous according to accommodationist view of endogeneity. There is a bidirectional causality between domestic credit and money supply, the central bank influences the money supply through the short-term interest rate. The liquidity preference view also supported.
(Köksel, 2016)	Monthly: 2006:1–2014:11	Johansen Cointegration	Total bank loans granted to private sector, money supply	Money supply is endogenous in Turkey
(Köksel, 2016)	Monthly: 2006:1–2015:11	Johansen Cointegration	The total bank credits to the private sector, money supply in the form of M2	There is a causality from bank credits to money supply in short run. But in the long run there is a bidirectional causality between the variables.
(Cepni & Guney, 2017)	Monthly: 2006.01–2015.05	Vector error correction (VECM), vector autoregressive (VAR) models, Johansen cointegration, Granger causality tests	Total bank loans, deposits, monetary base, the money supply variables (M1, M2, M3).	There is strong evidence for the endogeneity of money through accommodationist channel of transmission to the Turkish economy.

Appendix A2. Descriptive statistics

item	M2	BL
Mean	20.515	20.530
Std. dev.	0.309	0.482
Max.	21.065	21.246
Min.	19.972	19.590
Obs. no.	87	87

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