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

Abstract: In this study, we examine the money supply endogeneity in Turkish economy for the post crises period, between 2009.10 and 2016.12 by employing asymmetric causality test. Our results reveal that a positive credit shock will cause a positive shock in the money supply. That is, an increase in banking sector credit volume will cause an increase in money supply. However, such a causal impact for negative shocks is not found. Our findings show that the causality runs from bank loans to money supply for the positive components so credit cuts may not initiate a fall in money supply.


Introduction
Theory of money supply is a key subject in economics with a dynamic literature. In his book A Treatise on Money (1930), Keynes points out that banks' money is created via debt. According to Keynes, the money (i.e. credit) that banks can securely create is unlimited (Keynes, 1930). He suggests that the credit demand of firms stemming from their capital requirements has an impact on the money supply. However, contrary to A Treatise on Money (1930) previous book, in General Theory (1936 Keynes focused on the situations in which monetary policy is not effective (i.e. liquidity trap). In this analysis, he defined the money supply as being directly determined by the actions of the monetary authority (Heron & Tarik, 2006). Later, Hicks (1937) based his analysis on General Theory: Money supply is treated as a quantity that is determined exogenously in the IS-LM analysis, and his view dominated the literature on money supply from neoclassical synthesis to monetarists. According to this mainstream view of money supply, central banks play a key role in the money supply process; accordingly, the money supply is assumed to be exogenous. This approach assumes that the central bank has full control over the monetary base, 1 which implies that the money multiplier 2 is stable. In other words, the central bank is able to control the monetary base exogenously to achieve the targeted money supply levels (Palley, 1998). On the other hand, according to the post-Keynesian view, the interactions between loan demand and bank lending practices determine

PUBLIC INTEREST STATEMENT
Understanding the money supply creation process is important for proper macroeconomic policy designation and implementation. According to the mainstream view, the central bank has full control over the money supply, whereas the post-Keynesian view propounds the role of bank loans on the determination of the money supply (endogeneity). The way of money supply creation process is crucial with regard to the implementation of explicit inflation targeting policy in an emerging country like Turkey. Many recent studies have proved that the relationship between many macroeconomic variables is nonlinear and asymmetric. This study, therefore, analyses the endogeneity of money supply for Turkey considering the asymmetry issue. The results showed that the effect of credits on money supply is not symmetric. The implication of the results is that credit cuts may not initiate a fall in money supply. the money supply. In this approach, both commercial banks and the central bank contribute to the money supply process. Commercial banks grant loans and deposits have increased; consequently, central banks have accommodated all increases in demand for central bank money. The post-Keynesian endogenous money supply process has been studied under different views, such as the horizontalist, structuralist, and liquidity preference views. According to the horizontalist view, loans create deposits. This view implies that there is a unidirectional causality running from loans to monetary aggregates. In contrast, according to the structuralist and liquidity preference views, the causality between loans and monetary aggregates is bidirectional.
Examination of the literature reveals that the research on the endogeneity of money supply has extended to a broader research area by including household credits (Howells & Hussein, 1998). In addition, there is a related strand of literature investigating the relationship between credit and inflation (Atta-Mensah & Dib, 2008;Bikker, 2004;Gambetti & Musso, 2017;Groen, 2004;among others). The literature on credit-driven endogenous money supply is based on the idea of combining the Keynesian Phillips curve approach, which explains inflation through aggregate demand, and the mainstream approach, which explains inflation through the quantity of money. When consumption or investment expenditures are financed by credit, aggregate demand and money supply increase simultaneously.
The determination of the money supply is a tremendously important topic for proper macroeconomic policy designation and implementation. Turkey has been implementing explicit inflation targeting since 2006. The endogeneity issue is crucial with regard to the implementation of such a policy in an emerging country like Turkey. Hence, demonstrating the causality running from credit to money supply is crucial for an inflation-targeting central bank with regard to expectation formation. Because central banks are able to monitor the movements in bank credits almost simultaneously, they can foresee how the tendencies in these movements affect the money supply, and so inflation, and in what way. Accordingly, they conduct credit growth through adjusting the cost of making loans using tools such as policy rate and reserve requirement ratio.
The endogeneity of money supply makes the inflation-targeting strategy harder. However, because change in credit is the basic driver of money supply, credit movements would provide information about inflation to the monetary authority. The credit target set by the Central Bank of Turkey in 2011 is a measure used for this situation. The principal objective of this study is to investigate the money supply endogeneity in Turkey over the post-crisis period between 2009 and 2016.
Although the endogeneity of the money supply is the subject of a large number of theoretical studies, the number of empirical studies is rather limited. There are limited numbers of studies concerning emerging countries, especially Turkey. To the best of our knowledge, the literature that investigates the endogeneity issue mostly uses Granger causality or non-causality tests based on the traditional linear vector error correction (VECM) and vector autoregressive (VAR) models. Our study differs from previous studies in that, in this study we examine the endogeneity of money supply in Turkey through the use of the asymmetric version of the causality test (Granger, 1980), which is based on the VAR system, as proposed by Hatemi-J (2012), which allows for asymmetry in the relationship between variables. The asymmetry in the determination of the money supply may be an important topic for proper macroeconomic policy designation and implementation for a country such as Turkey. The main advantages of the method are as follows: First, it allows asymmetric causal effects, which better approximate the real world by separating the causal effects of positive shocks from those of negative shocks. However, the asymmetric causality test of Hatemi-J (2012) enables the full separation of the causal impacts of the positive alterations from the negative ones. Secondly, this test performs well when the sample size is small, the underlying data set is non-normally distributed, and time-varying volatility (autoregressive conditional heteroscedasticity) is present. In addition, this study contributes to the research gap in the quantitative literature on money supply endogeneity.
The rest of the article is organized as follows. Section 2 presents brief information about recent Turkish monetary policy developments. Section 3 gives literature review. Section 4 describes the data. Section 5 presents the methodology. Section 6 provides the empirical results. Section 7 presents the concluding remarks.

Brief review of recent Turkish monetary policy developments
Following the 1999 stabilization program under the consultancy of the International Monetary Fund (IMF), Turkey adopted a stabilization policy based on the crawling exchange rate peg in 2000, and this resulted in twin (currency and banking) crises. The Central Bank of the Republic of Turkey (CBRT) responded to the crisis by unavoidably allowing the Turkish Lira to freely float in February 2001. Subsequently, in April 2001, The Central Bank Law was amended to ensure the independence, accountability, and transparency of the Central Bank and to give the CBRT the primary objective of price stability along with financial stability. Because the direct financing of budget deficits using CBRT sources was considered as the main reason behind the money growth and inflation linkage since the 1960s (Yilmaz, Akçay, & Alper, 2002), the new law (Law 4651) prohibited CBRT from granting advances or extending credits directly to the treasury and to the other public institutions and establishments (Kara, 2008). Moreover, this process was accommodated by the primary surplus policy of the government to limit debt accumulation (Sener, 2011). Coincidentally, in May 2001, Turkey adopted a new stabilization program called "Turkey's Transition Program: Strengthening The Turkish Economy" to achieve macroeconomic stability (Özatay, 2005). The program also included a strategy designed to rescue the collapsed banking sector. Unfortunately, this strategy inevitably led to fiscal dominance, i.e. an additional increase in public debt-to-GDP ratio, and placed constraints on the implementation of monetary policy. Therefore, in order to create a suitable environment for the adoption of an explicit fully fledged inflation-targeting regime, contractionary fiscal policy was considered as a necessary condition for Turkey. Thus, in the period between 2002 and 2006 prior to the explicit inflation-targeting regime, CBRT implemented an implicit inflationtargeting regime (Ersel & Özatay, 2008) and targeted the monetary base as a nominal anchor under the floating exchange rate regime (Keyder & Ertunga, 2012). At the beginning of 2006, CBRT moved from implicit inflation targeting to fully fledged inflation targeting. 3 After this policy shift, instead of focusing on monetary base targets, CBRT began setting the inflation targets directly (Ozsuca & Akbostanci, 2013). In the period from 2006 to 2010, CBRT practiced a conventional inflation-targeting framework in which the main tool was the policy interest rate. In addition, with the purpose of dampening FX volatility and accumulating FX reserves, CBRT intervened in the FX market (Alper, Kara, & Yörükoğlu, 2013). In the aftermath of 2008, a zero lower bound interest rate and Quantitative Easing (QE) policies of Federal Reserve (FED) triggered a new episode of capital flows to emerging market economies. In this low-interest environment, Turkish commercial banks preferred to borrow from foreign money markets and lend to the domestic market. This action in turn increased domestic credit growth. These developments put appreciation pressure on the Turkish Lira and forced the CBRT to accumulate more reserves. Since traditional interest rate policy failed to achieve price and financial stability 4 simultaneously, CBRT diversified its policy tools and adopted an unconventional approach instead of the conventional inflation-targeting regime (Kara, 2013). As of 2011, the current account deficit ratio to GDP corresponded to approximately 9% and the ratio of net credit use to GDP exceeded 14% with a really high credit growth rate (44%). It was clearly evident that the current account deficit and change in bank credits tended to move together. Thus, CBRT determined a 15% threshold for the credit growth rate to achieve a sustainable current account deficit and to avoid a potential increase in inflation. To reduce the credit growth rate, CBRT preferred to increase the required reserve ratio instead of increasing the policy interest rate because increasing the policy interest rate would likely stimulate more capital inflow, which in turn potentially deteriorates the current account via currency appreciation. After the CBRT gradually increased the required reserve ratio for Turkish Lira liabilities, the credit growth rate tended to decrease in the second quarter of 2011 Alper, Binici, Demiralp, Kara, andÖzlü (2014). In the same period, policy instruments such as an interest rate corridor and the reserve option mechanism (ROM) were employed to absorb the shocks to reduce the need for FX intervention (Alper et al., 2013). The interest rate corridor lies between the overnight borrowing rate and the lending rate, and the 1-week repo interest rate fluctuates within the intervals of the corridor as a policy interest rate. The corridor strategy enables CBRT to change the short-term market interest rate (i.e. overnight interest rate) quickly without any official change in policy interest rate. With this tool, interbank market rates and the weighted average cost of central bank funding are changed on a daily or weekly basis, if necessary 5 (Alper et al., 2014). CBRT borrows from banks that have excess liquidity and lends money to banks that are short of liquidity. It is worth noting that the most important feature of the asymmetric interest rate corridor is its flexibility (Alper et al., 2013). As an additional reserve requirement tool, ROM allows banks to hold a part of their reserve requirements for Turkish Lira deposits in FX or gold. The amount of FX or gold corresponding to one unit of TL reserve is called the reserve option coefficient (ROC) (Aslaner, Çıplak, Kara, & Küçüksaraç, 2014). The ROM mechanism can be considered as an automatic stabilizer or an alternative tool to traditional FX intervention strategies. The main purpose of ROM is to reduce excessive capital flows. During periods of strong capital inflows because of the relatively high opportunity cost of holding TL reserves, banks would rather use the ROM. An increase in the ROM utilization ratio would be a sign of more capital inflow, thereby holding more FX in the central bank accounts helps prevent appreciation of the domestic currency. Conversely, during periods of capital outflow, the cost of FX borrowing would be relatively higher than the cost of domestic currency borrowing. Thus, banks would decrease the ROM usage and decrease the portion of FX that is held as required reserves in the bank's account at the central bank. This additional FX supply may help lower depreciation pressure on the domestic currency. The new instruments helped CBRT to control the effects of excess capital flows and to reduce the impact of credit growth and their effects on the current account balance.

Literature review
The ideas of Keynes (1930Keynes ( , 1936Keynes ( , 1972) provided a base ground for the emergence of endogeneity of money supply process. Jacques Le Bourva set out the present theory of endogenous money (Lavoie, 1992;Moore, 1983) and provided foundation of money supply endogeneity in Jacques Le Bourva (1959), Bourva (1962)).
Several studies in the empirical literature investigated the nature of money supply for different countries, time periods, and data types using different methods. These studies aim at revealing the endogenous nature of the money supply process empirically. One of the important empirical studies in deciding the endogeneity nature of money supply is (Kaldor, 1982) empirically investigated endogeneity of money supply for the UK over the period between 1966 and 1979 by employing the Ordinary Least Square (OLS) method. He found evidence for the endogeneity of money supply for UK. The findings indicate that the demand for bank lending determines money supply. In another early empirical study Moore (1983) analyzed money supply endogeneity for the USA over the period between using Granger causality analysis. He indicates that bank lending has a relatively high degree of explanatory power. Pollin (1991) examined the endogeneity of money supply using monthly USA data over the period between 1953 and 1988. He found evidence in favor of the structural view. (Palley, 1998) analyzed the endogeneity issue for the USA over the period between 1973 and 1990. The findings of the study indicate that money supply is endogenous in the USA, supporting the structural view.
More recent evidence increasingly favors the endogenous view. Examination of the literature reveals that researchers analyze the relationship using monthly, quarterly, or annual data. (i.e. Cepni & Guney, 2017;Howells & Hussein, 1998;Nishiyama, 2014;Pollin, 1991;Tas & Togay, 2012;Vera, 2001. In addition, the majority of the studies used regression, cointegration, vector auto regressive model-based approaches such as the standard vector autoregressive model, autoregressive distributed lag model, Granger causality, as well as Toda and Yamamoto non-causality (i.e. Cepni & Guney, 2017;Howells & Hussein, 1998;Kaldor, 1982;Nishiyama, 2014;Tas & Togay, 2012 among others). Furthermore, there are studies that utilize panel data framework (i.e. Nayan, Kadir, Abdullah, & Ahmad, 2013 among others). Some of the studies provide evidence for the endogeneity of money supply for different countries (i.e. Cepni & Guney, 2017;Kingdom & Elhendawy, 2016 among others). Another group of studies reports the exogeneity of money supply, (i.e. Luo, 2013;Seyrek, Duman, & Sarıkaya, 2004 among others). A third group of studies divides the relationship into short run and long run and some of them report significant long-run relationship between money supply and relevant variables (i.e. Lopreite, 2012;Schady, 2012 among others). In order to preserve space, a detailed list of studies presenting the data period, method, variables, and result of the relevant studies belonging to this literature is provided in Appendix A1 in the appendix section.

The data
We chose the sample period in this study based on two considerations. First, our aim was examining the endogeneity of money supply over post crises-period. The recession period in Turkey is determined to be in 2008m7 to 2009m9, 6 accordingly the post-crisis period is assumed to start by 2009m10. Second, the beginning of the study period precedes the phase where CBRT adopted its unconventional approach in place of orthodox inflation targeting regime. In this study, we used the available monthly data covering the period 2009m10-2016m12. In our empirical analysis, total bank loans (BL), deposits and the money supply variables M2 are used. All variables are in logarithmic form. The descriptive statistics are provided in Table A2.

Methodology
In Granger causality analysis researchers test whether the past values of a variable improve the forecast of another variable or not. The general wisdom in the literature is testing the Granger causality using the methods which base on the supposition that the causal impact of positive shocks negative shocks are similar. Hatemi-J (2012) suggests constructing the positive and negative shocks using the cumulative sums of the underlying shocks, which was first proposed by (Clive W. J. Granger & Yoon, 2002). In this article, we are interested in testing for causality between variables BL and M. Given that BL and M difference stationary, they can be presented as random walk processes as follows: Where t ¼ 1:2:3::::; T. BL 0 and M 0 are the initial values. ε 1t and ε 2t are the white noise error terms. Identification of the positive and negative shocks is as follows: ε þ 1i ¼ maxðε 1i ; 0Þ, ε þ 2i ¼ maxðε 2i ; 0Þ,ε À 1i ¼ minðε 1i ; 0Þ, ε À 2i ¼ minðε 2i ; 0Þ. Thus each shock can be expressed as the sum of negative and positive parts as the following: Finally, the positive and negative shocks of the variables can be expressed as cumulative sums (Positive and negative components).
These positive and negative components can be used to test the asymmetric causality between the variables by constructing a VAR model.
The VAR of order L can be presented as follows: The VAR models of order L for both negative and positive parts can be written in the following way: The vector containing the positive parts of the variables.
y À t : The vector containing the negative parts of the variables.
y þ t and y À t are 2 × 1 vector of the positive (BL þ t ; M þ t ) and the negative parts (BL À t ; M À t ) of the variables, respectively. υ and ς are 2 × 1 vector of intercepts, u þ t and u À t 2 × 1 vector of error terms. A þ r and A À r are 2 × 2 matrix of parameters for lag order r where r ¼ 1; . . . ; p The null hypothesis for non-Granger causality for positive and negative parts is given as follows: H 0 : the row m, column n element in A þ r equals zero for r ¼ 1; . . . ; p. (The null for the positives) H 0 : the row m, column n element in A À r equals zero for r ¼ 1; . . . ; p. (The null for the negatives) The null of non-Granger causality is tested using the Wald statistic. 7 The Wald statistic follows an asymptotic χ 2 distribution with p degrees of freedom. In the presence of non-normality and time-varying volatility bootstrap simulation technique is employed as a remedy. 8

Empirical results
Prior to the asymmetric causality analysis we conducted the standard causality testing procedure. In the first step of the analysis we conduct ADF and PP unit root tests. We found evidence that each of the series is difference stationary at 1% level of significance. The unit root test results are presented in Table 1.
After assessing the nonstationarity of the series we further conducted cointegration analysis using the VAR-based Johansen cointegration approach (Johansen, 1988). According to the results provided in Table 2, both trace and maximum Eigenvalue statistics exceed the critical values at conventional significance levels. We conclude that series are cointegrated. 9 In the next step, we set up the vector error correction model. The results are provided in Table 3. According to Table 3, for the specification in which M2 is the dependent variable, error correction term denoted by δ is negative and significant. This is an indicator for long-run causality running from bank loans to money supply. In addition β 1 and β 2 are jointly different  (Mackinnon, 1996)   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. than zero. This is a sign for short-run monetary endogeneity. The model is free of serial correlation and heteroscedasticity. In addition, residuals are normally distributed. For the second specification where BL is the dependent variable we conclude that there is no shortrun or long-run causality running from M2 to BL.
To crosscheck our results we also applied Toda and Yamomoto procedure. The results are provided in Table 4. We reject the null hypothesis of BL does not Granger cause M2, however, we cannot reject the opposite hypothesis.
After obtaining empirical evidence in favor of money supply endogeneity for the post-crisis period in Turkey using standard methods we further analyzed the endogeneity issue using asymmetric causality procedure of Hatemi-J (2012). We began our analysis by conducting a battery of diagnostic and specification tests and the results for the VAR model are shown in Table 5. The null hypothesis of no serial correlation and no multivariate autoregressive conditional heteroscedasticity is rejected for three cases. Thus, it is important to make use of the bootstrap test to obtain reliable critical values for the causality tests and correct inference.
The results of the symmetric and asymmetric causality tests are presented in Table 6. Based on the symmetric causality test results, the null hypothesis that BL do not Granger-cause the M2 is rejected at 1% significance level. This is also the case for positive cumulative BL shocks. In addition, the null hypothesis that negative component of BL does not Granger-cause the positive component of M2 is rejected at 10% significance level. The null of no Ganger causality cannot be rejected for the remaining seven cases.

Conclusion
The empirical goal of this study is to investigate the money supply endogeneity in Turkey over the post-crisis period of 2009 to 2016. We use a recently developed test by Hatemi-J (2012) that allows for asymmetries in the causality testing. The results reveal that a positive credit shock will cause a positive shock on the money supply. This means if banking sector credit volume increases, then the money supply will also increase. However, we cannot find such a causal impact for  negative shocks. The monetary authority may intervene by taking action during times of positive credit growth. On the contrary, in the periods when credit growth slows down, there is no conclusion as to whether it is necessary to implement an expansionary policy by decreasing interest rates. In other words, credit cuts may not initiate a fall in money supply.

Author details
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  (Shanmugam, Nair, & Li, 2003) Quarterly  (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) (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)  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.
(Continued) Dedeoglu & Ogut, Cogent Economics & Finance (2018) 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 There is strong evidence for the endogeneity of money through accommodationist channel of transmission to the Turkish economy.