Determinants of Dollarization of Savings in the Turkish Economy

Nicoleta Bărbuță-Mișu,Selim Duramaz,Tuna Can Güleç,Florina Oana Virlanuta

doi:10.3390/su12156141

Nicoleta Bărbuță-Mișu, Selim Duramaz + Show 2 more

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https://doi.org/10.3390/su12156141

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Abstract

This study aims to analyze the nature of the dollarization that takes place in the Turkish economy and to decompose the factors that have contributed to its increase in recent years. With this purpose, we first identify the events that have significantly affected the dollarization trend in Turkey using the Iterative Cumulative Sum of Squares (ICSS) and Markov Switching Dynamic Regression (MS-Dynamic) structural break models. Then, we proceed to analyze the relationship between the percentage of Forex deposits of the residents over total deposits of the residents and the TRY/USD exchange rate using the Johansen cointegration test. USD, EUR, and TRY interest rates are also added to the model as independent variables to account for the effects of the difference between exchange rates. Long-term and short-term effects are tested with the Vector Error Correction Model, and causality is tested using the Granger causality test. The results of the study indicate that speculative trading is not the cause of the dollarization of deposits in Turkey. Additionally, results suggest that the political events have a stronger influence over dollarization compared to economic events. Collectively, our findings suggest that domestic citizens dollarize their deposits with the motivation to protect against political ambiguity rather than economic volatility. The results of the study are in line with the literature in the sense that they support the claim that dollarization can be averted in the short run with an increase in interest rates.

Highlights

The term “dollarization” was initially used to express foreign currency demand when considering the choice of the US dollar in Latin American countries
Dollarization refers to the unregulated process of preferring foreign currencies instead of the domestic currency in an economy, as a result of the financial decisions of its citizens
The MS-Dynamic model is based on the methodology used in the study of Kenourgios and Dimitriou (2015) and is designed to allow for a two-stage estimation of the conditional covariance matrix

Summary

Introduction

The term “dollarization” was initially used to express foreign currency demand when considering the choice of the US dollar in Latin American countries. Residents of countries that have constantly depreciating currencies have a tendency to deposit their savings in foreign currencies in order to protect their wealth. This occurs as citizens of a nation prefer to use a foreign currency in their daily life transactions or as their saving deposits instead of their domestic currency. This unofficial transformation, does not take place as a planned government policy

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