The Demand for Base Money in Turkey : Implications for Inflation and Seigniorage

This paper presents estimates of the demand for money function derived from two alternative opportunity cost of holding money for the Turkish economy over the period 1988-2000. The specification of the equilibrium relationship is problematic in that real money balances are integrated of order one while the inflation rate and the depreciation of TL against US dollar are integrated of order zero. However it is possible to show that the logarithm of real money balances is stationary around a segmented linear time trend with a break in 1994. The parameter estimates obtained are used to investigate the inflation level and the extent to which real seigniorage revenues have been exploited within the Turkish economy.