The Endogenous Money Theory in the Open Economy, Turkish Case

The purpose of this study is to consider a range of issues which arise in an open economy context when money is treated as endogenously created by the banking system. In this dissertation, the aim is to further develop the Post Keynesian analyses of the behaviour and decision making of the economic agents in the monetary processes and in the demand for money, and extended into an open economy context. The central bank has a role to play in terms of setting monetary policies, setting the interest rate and acting as a lender of last resort. The behaviour of the central bank, in terms of playing these roles, is analysed by considering the difference of the open economy macroeconomic variables, for example, exchange rate, foreign trade, balance of payment conditions, compare to closed economy view point. Similarly, the behaviour of the banking system in the credit creation process and their response to behaviour of the central bank are explored further. Behaviour of the banking system, with regard to their liquidity preference, is analysed in terms of setting the mark-up, supplying credit, and re-arranging their portfolios. The behaviour of households and firms are explored with regard to their decision of demanding loans, holding a currency, rearranging the portfolio decision, by considering their own liquidity preference. In addition to the theoretical developments, this dissertation includes two empirical analyses, in terms of central banking and banking in Turkey. Firstly, it explores how the Turkish central bank (the CBRT) responds to the changes in inflation gap, output gap, foreign currency reserve and exchange rate in setting the policy interest rate. Secondly, 18 partially structured and partially semi-structured interviews with senior bankers in Turkey were conducted. In the first section, the bankers’ perceptions of monetary policies implemented by the central bank are explored. In the second section, the semi-structured interviews helped to discover how these macroeconomic changes take place in the banker’s decision in the credit creation process.