An Analysis on Determinants and Stability of Money Demand: the Case of Turkey

In this study, the stability of money demand is investigated using monthly data for the period 2005:12- 2012:10. first, the presence of a long-run equilibrium relationship among m2 monetary aggregate, real income, interest rate, and exchange rate is examined through johansen cointegration test. after that, stability of money demand is analyzed using cusum and cusumsq tests. the results are in support of a long-run relationship among variables of interest. however, stability of money demand function is rejected. thus, it is not efficient for central bank of turkey to apply a monetary policy based on m2 monetary aggregate.