On the Link between Dollarisation and Inflation: Evidence from Turkey1
AbstractThis 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 InfoArticle provided by Palgrave Macmillan in its journal Comparative Economic Studies.
Volume (Year): 45 (2003)
Issue (Month): 3 (September)
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Other versions of this item:
- Ilker Domac & Mohsen Bahmani-Oskooee, 2002. "On the Link between Dollarization and Inflation : Evidence from Turkey," Discussion Papers 0207, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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