THE MONEY SUPPLY MECHANISM IN TURKEY

This paper examines Turkey's money supply\nprocess in an attempt to explain the inflationary\naccelerations in monetary growth which occurred\nin the 1950s and 1970s. The analysis suggests that\naccelerated monetary expansion originated in rapid\nincreases in foreign exchange receipts, which raised\nnet foreign assets. Rather than sterilising the effect\nof higher net foreign assests on the money supply,\nthe central bank responded by expanding domestic\ncredit to finance a greater volume of capital equipment\nand raw material imports. The central bank\nthen followed the real bills doctrine, accommodating\nwith a lag demand pressures generated by the\naccelerating rise in nominal gross national product.\nThis inflationary spiral was checked only after the\neconomy had suffered acute balance of payments\ndisruptions.