Determinants of dollarization of savings in the Turkish economy

Abstract

This study aims to analyze the nature of the dollarization that takes place in the Turkish economy and to decompose the factors that have contributed to its increase in recent years. With this purpose, we first identify the events that have significantly affected the dollarization trend in Turkey using the Iterative Cumulative Sum of Squares (ICSS) and Markov Switching Dynamic Regression (MS-Dynamic) structural break models. Then, we proceed to analyze the relationship between the percentage of Forex deposits of the residents over total deposits of the residents and the TRY/USD exchange rate using the Johansen cointegration test. USD, EUR, and TRY interest rates are also added to the model as independent variables to account for the effects of the difference between exchange rates. Long-term and short-term effects are tested with the Vector Error Correction Model, and causality is tested using the Granger causality test. The results of the study indicate that speculative trading is not the cause of the dollarization of deposits in Turkey. Additionally, results suggest that the political events have a stronger influence over dollarization compared to economic events. Collectively, our findings suggest that domestic citizens dollarize their deposits with the motivation to protect against political ambiguity rather than economic volatility. The results of the study are in line with the literature in the sense that they support the claim that dollarization can be averted in the short run with an increase in interest rates. © 2020 by the authors.