Factors Affecting Time Deposits in Turkey

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THE CITY UNIVERSITY OF NEW YORK

BROOKLYN COLLEGE

ECONOMICS DEPARTMENT
MS BUSINESS ECONOMICS

ECONOMETRICS PROJECT

REGRESSION ANALYSIS:
FACTORS AFFECTING TIME DEPOSITS IN TURKEY

ILYAS DOGAN 109965454

NEW YORK

DECEMBER-2010

Abstract

This paper examines the factors that impact the time deposits in Turkey by using the linear regression analysis. There are lots of elements which affect the time deposits. In my regression model, I used some of them such as; exchange rate, interest rate, consumer price index, wholesale price index and gold prices. These are my independent variables whereas time deposit is my dependent variable. I also adjusted the US Dollar/ Turkish Lira exchange rate because Turkey started using The New Turkish Lira by dropping 6 zeros from the currency Turkish Lira on 01.01.2005. The reference of all variables is http://evds.tcmb.gov.tr/ Meanings of the variables as follows;

Time Deposit( TD): Annually equivalent of monthly time deposits traded in banks. Exchange Rate (ET): New Turkish Lira equivalent of the average dollar exchange rate during the year. Interest Rate (IT): Annually equivalent of weighted 12-month term deposits interest rate. Wholesale Price Index (WPI): Annually percentage changes in wholesale price index. Consumer Price Index (CPI ) : : Annually percentage changes in consumer price index. Gold Price (GP) : New Turkish Lira equivalent of the average gold price during the year.

Variables are monthly data which contains 60 months from January 1998 to December 2002. Financial market in Turkey have started to get increased recently. After crisis, people began trusting the banking system and tried to gain more interest. This laid people to put out at interest their money. Time deposit is one of the most preferred ways by people to get interest on money. There are some factors affect people’s decisions. I tried to explain those factors in my regression model. Theoretically; if the interest rate of the domestic currency increases and and revenue of domestic currency is estimated to be higher than exchange rate, demand on the time deposit will increase since the cost of keeping foreign currency will increase. Thus, exchange rate decreases which effects the demand on the time deposit positively. However , developing countries like Turkey can keep the interest rate high since they have a domestic dept problem. Turkey is a country that lives economic crisis almost every decade, even though it seems more powerful during the last decade. Those crisis cause the domestic currency to depreciate and the inflation to increase. This situation makes exchange rate and time deposit to seem directly proportional although they are not theoretically. That’s why our expected sign for exchange rate’s coefficient is (?) neither positive nor negative, whereas our expected sign for interest rate’s coefficient is (+) positive. WPI and CPI increases due to the inflation problem. Inflation is general and progressive increases in prices. When prices goes up WPI and CPI goes up as well. Therefore, our expected sings for both WPI and CPI’s coefficients are (+) positive. Gold is a alternative investment tool for time deposits. If gold prices increases , time deposit decreases since people want to keep their money on something more profitable. Thus, coefficient of gold’s expected sign is (-) negative.

Data
|Month/Year |Time |Exchange |Interest |WPI |CPI |Gold | | |Deposit |Rate |Rate | | |Price | |1/1998 |4364322 |0,21216 |7.819 |839.1 |919.4 |1344.000 | |2/1998 |4343010 |0,22377 |7.783 |877.4 |960.0 |1481.250 | |3/1998 |4674915 |0,23593...
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