Dynamics of deposit dollarization in Turkey

A. Yasemin Yalta; A. Talha Yalta

doi:10.58567/jea03020004

Authors

A. Yasemin Yalta Department of Economics, Hacettepe University, Ankara, Turkey https://orcid.org/0000-0002-9854-9813
A. Talha Yalta Department of Economics, TOBB University of Economics and Technology, Ankara, Turkey https://orcid.org/0000-0003-2660-1480

DOI:

https://doi.org/10.58567/jea03020004

Keywords:

Dollarization; maximum entropy bootstrap; time varying analysis; Turkey

Abstract

Deposit dollarization in Turkey has been on the rise, reaching record levels in 2022. This was caused by the worsening macroeconomic fundamentals along with the transition to the presidential system in 2018 and the associated deviation from the monetary policy stance afterward. The unique case of Turkey presents an excellent natural experiment to explore the dynamics of deposit dollarization and how it is affected by the changes in the institutional structure as well as various social, economic, and financial shocks in a relatively short time. This study examines the time varying reactions of deposit dollarization for the period between 2013 and 2022 based on rolling window maximum entropy bootstrap estimates. Our findings reveal that all the model variables had significant and sometimes asymmetric effects on deposit dollarization during the different stages of this turbulent period. In particular, we observe diminishing effects of real exchange rate, policy credibility and consumer confidence over time. The findings provide ample new evidence regarding the dynamics of deposit dollarization in general, and how it is affected by loss of monetary policy credibility.

Author Biography

A. Yasemin Yalta, Department of Economics, Hacettepe University, Ankara, Turkey

A. Yasemin Yalta is a professor of economics at Hacettepe University, Turkey. She received a B.A. in political science and public administration from Middle East Technical University, Turkey in 1999, and received a PhD. in economics from Fordham University, USA in 2007. Her main areas of research are macroeconomics, international economics and applied econometrics. Her articles has been published in leading journals including International Review of Economics and Finance, Economic Modelling, Energy Economics, Computational Economics, and Emerging Markets Finance and Trade. She also co-authored, with A. Talha Yalta, two economics textbooks entitled Modern Mikroekonomiye Giriş and Modern Makroekonomiye Giriş in Turkey.

References

Akcay, Ü., Güngen, A.R. (2019) : The making of Turkey's 2018-2019 economic crisis, Working Paper, No. 120/2019, Hochschule für Wirtschaft und Recht Berlin, Institute for International Political Economy (IPE), Berlin

Alesina A., Barro R.J. (2001). Dollarization. The American Economic Review, 91 (2), 381–385. https://doi.org/10.1257/aer.91.2.381

Arteta C.O. (2005). Exchange rate regimes and financial dollarization: Does flexibility reduce currency mismatches in bank intermediation? B.E. Journal of Macroeconomics: Topics in Macroeconomics, 5(1), 1–28. https://doi.org/10.2202/1534-5998.1226

Barbuta-Misu N., Gulec T.C.. Duramaz S., Virlanuta F.O. (2020). Determinants of dollarization of savings in the Turkish economy. Sustainability, 12 (15), 61–41. https://doi.org/10.3390/su12156141

Bocola L., Lorenzoni G. (2020). Financial crises, dollarization and lending of last resort in open economies. The American Economic Review, 110 (8), 2524–2557. https://doi.org/10.1257/aer/20180830

Breiman L. (1996). Bagging predictors. Machine Learning, 24, 123–140. https://doi.org/10.1007/BF00058655

Cakmakli C., Demiralp S. (2020). A dynamic evaluation of central bank credibility. Koc University-TUSIAD Economic Research Forum Working Paper Series, No: 2015. https://eaf.ku.edu.tr/wp-content/uploads/2020/10/erf_wp_2015.pdf

Calvo, G., Vegh, C. (1992). Currency substitution in developing countries: An introduction. Revista de Analisis Economico, 7, 3–28. https://doi.org/10.5089/9781451845884.001

Carranza,L. Galdon-Sanchez, J., Gomez-Biscarri, J. (2009). Exchange rate and inflation dynamics in dollarized economies. Journal of Development Economics, 89 (1), 98-108. https://doi.org/10.1016/j.jdeveco.2008.06.007

Central Bank of the Republic of Turkey, Electronic Data Delivery System, https://evds2.tcmb.gov.tr/, Accessed: June 13th, 2022.

Civcir, I. (2005). Dollarization and its Long-run Determinants in Turkey", Neaime, S. and Colton, N.A. (Ed.) Money and Finance in the Middle East: Missed Oportunities or Future Prospects? (Research in Middle East Economics, Vol. 6, Emerald Group Publishing Limited, Bingley, 201-232. https://doi.org/10.1016/S1094-5334(05)06010-3

Cowan K., Do Q.T. (2003). Financial dollarization and central bank crediblity. The Word Bank Policy Research Working Papers, No: 06.2003. https://doi.org/10.1596/1813-9450-3082

De Nicolo G., Honohan P., Ize A. (2005). Dollarization of bank deposits: Causes and Consequences. Journal of Banking & Finance, 29 (7), 1697–1727. https://doi.org/10.1016/j.jbankfin.2004.06.033

De Nicoló, G., Patrick, H., & Ize, A. (2003). Dollarizing the banking system: Good or Bad (No. 146; IMF Working Paper).

Demiralp S., Demiralp S. (2019). Erosion of Central Bank independence in Turkey. Turkish Studies, 20 (1), 49–68. https://doi.org/10.1080/14683849.2018.1505512

Dumrul C. (2010). Turk ekonomisinde para ikamesinin belirleyicilerinin sınır testi Yaklasimi ile eş-butunlesme analizi. Erciyes Universitesi Iktisadi ve Idari Bilimler Fakultesi Dergisi, 0 (35), 199–231. https://dergipark.org.tr/en/pub/erciyesiibd/issue/5892/77934

Gurkaynak RS, Kisacikoglu B, Lee SS. 2022. Exchange rate and inflation under weak monetary policy: Turkey verifies theory. CESifo Working Paper Series No. 9748.

Honohan P. (2007). Dollarization and exchange rate fluctuations. IIIS Discussion Paper, No. 201, Available at SSRN: https://ssrn.com/abstract=958052

Horowitz J.L. (2003). The bootstrap in econometrics. Statistical Science, 18, 211–218. https://doi.org/10.1214/ss/1063994976

Ize A., Yeyati E.L. (2003). Financial dollarization. Journal of International Economics, 59 (2), 323–334. https://doi.org/10.1016/S0022-1996(02)00017-X

Kesimal N.D. (2021). Reflections on recent trends in deposit dollarization in Turkey. Unpublished Master’s Thesis, Bilkent University, http://repository.bilkent.edu.tr/handle/11693/76246

Kolcu, F., & Yamak, R. (2022). Döviz Kurunun Mevduat Dolarizasyonu Üzerindeki Asimetrik Etkisi. İzmir İktisat Dergisi, 37 (2), 481-500.

Levy Yeyati, E. (2006). Financial dollarization: Evaluating the consequences. Economic Policy, 21 (45), 62-118. http://www.jstor.org/stable/3601043

Luca A., Petrova I. (2008). What drives credit dollarization in transition economies? Journal of Banking & Finance, 32 (5), 858–869. https://doi.org/10.1016/j.jbankfin.2007.06.003

Macedo P. (2022). A two-stage maximum entropy approach for time series regression Communications in Statistics – Simulation and Computation, Ahead-of-print, 1–11. https://doi.org/10.1080/03610918.2022.2057540

MacKinnon J.G. (2006). Bootstrap methods in econometrics. Economic Record, 82, 2–18.

Metin-Ozcan K., Us, V. (2007). Dedollarization in Turkey after decades of dollarization: A myth or reality? Physica A, 385 (1), 292–306. https://doi.org/10.1016/j.physa.2007.06.018

Organization for Economic Development and Cooperation (2021). OECD Economic Surveys

Park H., Son J.C. (2020). Dollarization, inflation and foreign exchange markets: A cross-country analysis. International Journal of Finance and Economics, Ahead-of-print, 1–13. https://doi.org/10.1002/ijfe.2295

Sever, E. (2012). Turkiye'de dolarizasyon sureci ve doviz kuru belirsizligi iliskisi. Sosyoekonomi, 17 (17), 203–222.

Singvejsakul J., Chaiboonsri C., Sriboonchitta S. (2018). Frontier of error minimization from copula model application: Evidence from dependence structure of BRICS’s stock markets. Journal of Physics: Conf. Series 1053. https://doi.org/10.1088/1742-6596/1053/1/012123

Turkey, https://www.oecd.org/economy/surveys/TURKEY-2021-OECD-economic-survey-overview.pdf

Vinod H.D. (1993). Bootstrap methods: Applications in econometrics. In: Maddala G.S., Rao C.R., Vinod H.D. (eds) Handbook of Statistics: Econometrics, 11. North Holland, Elsevier, New York, 629–661.

Vinod H.D., de-Lacalle J.L. (2009). Maximum entropy bootstrap for time series: the meboot R package. Journal of Statistical Software, 29, 1–19. https://doi.org/10.18637/jss.v029.i05

Vinod, H.D. (2004). Ranking mutual funds using unconventional utility theory and stochastic dominance. Journal of Empirical Finance, 11, 353–377. https://doi.org/10.1016/j.jempfin.2003.06.002

Vinod, H.D. (2015). New bootstrap inference for spurious regression problems. Journal of Applied Statistics, 43 (2), 317–335. https://doi.org/10.1080/02664763.2015.1049939

Weneyam H.B. (2017). Do domestic bond markets participation help reduce financial dollarization in developing countries? Economic Modelling, 66, 146–155. https://doi.org/10.1016/j.econmod.2017.06.008

Yalta, A.T. (2016). Bootstrap inference of level relationships in the presence of serially correlated errors: A large scale simulation study and an application in energy demand. Computational Economics, 48, 339–366. https://doi.org/10.1007/s10614-015-9530-7

Yılmaz, K.Ç. (2022). Time-varying causality between dollarization and exchange rate. Business and Management Studies: An International Journal, 10 (1): 163-175. https://doi.org/10.15295/bmij.v10i1.1982