Exchange Rate Movements, Inflation Expectations, and Currency Substitution in Turkey

November 1, 1995

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper contains an empirical analysis of currency substitution in Turkey: a simple relationship between the share of foreign currency holdings in M2X on one side and movements in the exchange rate or inflation on the other is derived from a two-stage portfolio choice model. This relationship is estimated by band spectrum regression which allows to remove from the data the short-term cyclical components. The results show that the relationship between currency substitution depends mainly on long-term movements in the exchange rate, while the effect of inflation on currency substitution is not statistically significant.

Subject: Currencies, Dollarization, Exchange rates, Foreign exchange, Inflation, Monetary policy, Money, Nominal anchors, Prices

Keywords: Currencies, currency balance, Dollarization, exchange rate dynamics, exchange rate movement, Exchange rates, foreign currency holding, Fourier transform, Inflation, inflation differential, inflation rate, money balance, Nominal anchors, price level, WP

Pages:
21
Volume:
1995
DOI:
https://doi.org/10.5089/9781451853414.001
Issue:
111
Series:
Working Paper No. 1995/111
Stock No:
WPIEA1111995
ISBN:
9781451853414
ISSN:
1018-5941

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