Money Supply, Inflation and Dollarization: An Analysis on Türkiye Using Fourier Models

Abstract

This study examines the impact of inflation and money supply on dollarization. Especially in recent years, the rapid rise of the exchange rate and inflation in Türkiye has put the phenomenon of dollarization back on the agenda. The study covers the period 2012Q4-2023Q4. The study first applies the Fourier ADL cointegration test, which allows for soft breaks. As a result of the test, it was found that the variables have a long run relationship. In the short run, only budget revenue has a positive effect on dollarization. In the long run, the exchange rate, exports, money supply, and deposit rates have a positive effect, while inflation has a negative effect. The study also applied the Fourier-Toda-Yamamoto causality test. As a result of the test, bidirectional causality was found between exchange rate, inflation and money supply variables and dollarization. The striking result of the study is that inflation has a negative impact on dollarization. This result, which is consistent with some studies in the literature, is attributed to the money supply. Although the demand for foreign exchange increases because the money supply is higher than inflation, the dollarization index decreases. This explanation can explain the negative relationship.