Time-varying causality between dollarization and exchange
rate

Kubilay Çağrı YILMAZ

Time-varying causality between dollarization and exchange rate

Date

2022

Authors

Kubilay Çağrı YILMAZ

Abstract

Dollarization is evaluated under two subheadings in the literature: full dollarization and partial dollarization. In full dollarization, the country ultimately uses its currency and uses another currency. In contrast, partial dollarization corresponds to the axis dislocation of foreign currencies in asset purchases to protect the purchasing power of economic units in a country due to the devaluation of the domestic currency in a high inflation situation. From this point of view, Turkey has practised the concept of partial dollarization during periods of high inflation and sudden shocks over the years, and studies in this area have maintained their continuity. Therefore, there is strong evidence in the literature that there is a relationship between dollarization and inflation or the exchange rate. Based on the fact that the relationship may change over time, time-varying Granger causality analysis was used in this study. Unit root, non-linear unit root, and CMS break unit root tests were applied in this context. In this study, which investigates the asymmetric causality relationship between the dollarization index obtained by the ratio of the total foreign currency deposits in the banking sector (including the deposits of natural domestic persons) t o the M 2 m oney s upply and t he U SDTRY nominal exchange rate, the monthly data of 12.2012 – 10.2021 were used. According to the findings obtained from the analysis, there is causality between the exchange rate and dollarization in Turkey, but it is not continuous. Depending on the cyclical fluctuations, the pass-through effect from USDTRY to Dollarization index and from Dollarization index to USDTRY has been determined in different periods. When the causality is decomposed, it is concluded that the variable-time Granger causality results. At the same time, dollarization is the cause of USDTRY in political tensions and uncertainty cases. USDTRY is the cause of dollarization in financial tensions and economic uncertainty cases.