The Effect Of Inflation On Currency Substitution (Dollarization) An Analysis: On Türkiye NUTS2 Regions

Abstract

Dollarization is one of the phenomena that money markets of developing economies frequently experience in the twentieth century. Many studies associate dollarization with inflation through the depreciation of the national currency and compare the results by country and/or region. The aim of this study is to determine the long-term and short-term effects of the inflation rate on dollarization in Turkiye within the scope of regions. In addition to the use of heterogeneous panel data methods in the process of analyzing the subject, obtaining inferences from a regional perspective can be noted as the most important difference from other studies. In the study, quarterly data belonging to 26 statistical regions were used for the period 2007:4-2021:4. According to the DCCE results, the inflation rate in the long term positively affects dollarization in three regions (TRC2, TR42 and TR81). In addition, according to the MG forecast results covering the entire panel, a 10%-point increase in the inflation rate increases dollarization by 2% points in the long term. In order to determine the short-term relationship, Emirmahmutoğlu and Köse (2011) panel causality test was applied. According to the results of the causality test, when the entire panel is taken into account, the inflation rate is not the reason for dollarization. However, heterogeneous results show that the inflation rate is the reason for dollarization in 13 of the 26 regions.