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On the Link between Dollarisation and Inflation: Evidence from Turkey1

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  • Mohsen Bahmani-Oskooee

    (University of Wisconsin-Milwaukee, USA)

  • Ilker Doma�

    ()
    (The Central Bank of Turkey, Turkey.)

Abstract

This paper investigates the role of dollarisation in the dynamics of inflation in Turkey. Descriptive analysis suggests that, in addition to high inflation and economic instability, institutional factors also played an important role in the evolution of dollarisation in Turkey. The empirical findings corroborate the importance of dollarisation in the dynamics of inflation. The results suggest that shocks to dollarisation initially lead to a decline in the monetary base as the public switches from domestic to foreign money holdings. However, the monetary base increases later on to generate the required inflation tax for a given budget deficit. The findings also indicate that the fiscal authority tries to compensate part of the decline in inflation tax through raising administered prices. As expected, the exchange rate responds positively to shocks to dollarisation owing to the high elasticity of substitution between domestic and foreign currency. Comparative Economic Studies (2003) 45, 306–328. doi:10.1057/palgrave.ces.8100022

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

Volume (Year): 45 (2003)
Issue (Month): 3 (September)
Pages: 306-328

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Handle: RePEc:pal:compes:v:45:y:2003:i:3:p:306-328

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Cited by:
  1. Metin-Özcan, Kıvılcım & Us, Vuslat, 2007. "Dedollarization in Turkey after decades of dollarization: A myth or reality?," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 385(1), pages 292-306.
  2. Dominique Torre & Alain Raybaut, 2004. "Unions monétaires, caisses d'émission et dollarisation : les fondements analytiques des systèmes de change « ultra-fixes »," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 75(2), pages 37-54.
  3. Yinusa, D. Olalekan, 2009. "Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data," MPRA Paper 16259, University Library of Munich, Germany, revised 2009.
  4. Lula G. Mengesha & Mark J. Holmes, 2013. "Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 99-118, June.
  5. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers, Research and Monetary Policy Department, Central Bank of the Republic of Turkey 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  6. Levent, Korap, 2007. "Does currency substitution affect exchange rate uncertainty? the case of Turkey," MPRA Paper 20319, University Library of Munich, Germany.
  7. K C Neanidis & C S Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 71, Economics, The Univeristy of Manchester.
  8. Oya Pınar Ardıc & Faruk Selcuk, 2006. "The dynamics of a newly floating exchange rate: the Turkish case," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(8), pages 931-941.
  9. Ardic, Oya Pinar, 2006. "Output, the Real Exchange Rate, and the Crises in Turkey," MPRA Paper 6099, University Library of Munich, Germany.
  10. John J. Seater, 2008. "The Demand for Currency Substitution," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(4), pages 405-437, December.
  11. Ayadi, Rym & Arbak, Emrah & Ben-Naceur, Sami & De Groen, Willem Pieter, 2013. "Determinants of Financial Development across the Mediterranean," CEPS Papers, Centre for European Policy Studies 7770, Centre for European Policy Studies.
  12. Faruk Selçuk, 2005. "The Policy Challenge with Floating Exchange Rates: Turkey’s Recent Experience," Open Economies Review, Springer, Springer, vol. 16(3), pages 295-312, July.
  13. Levent, Korap, 2006. "An empirical analysis of Turkish inflation (1988-2004): some non-monetarist estimations," MPRA Paper 19630, University Library of Munich, Germany.
  14. Aysen Arac & Funda Telatar & Erdinc Telatar, 2012. "Investigating the Time Varying Nature of the Link between Inflation and Currency Substitution in the Turkish Economy," Hacettepe University Department of Economics Working Papers, Hacettepe University, Department of Economics 20122, Hacettepe University, Department of Economics.

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