Dollarization and Risk Premium in a Risky Country: An Investigation on Turkiye

Murat Eren, Selim Basar and Bengu Tosun ()
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Murat Eren: Igdir University, Faculty of Economics and Administrative Sciences, Department of Health Management, Igdir, Turkiye
Selim Basar: Anadolu University, Faculty of Economics, Department of Labour Economics and Industrial Relations, Eskisehir, Turkiye
Bengu Tosun: Independent Researcher, Erzurum, Turkiye

Istanbul Journal of Economics-Istanbul Iktisat Dergisi, 2022, vol. 72, issue 72-2, 625-651

Abstract: In this study, developed from the importance of the deformation caused by dollarization in developing countries, the effect of risk level on financial dollarization is examined. In the research conducted for Turkey, one of the riskiest countries in the world according to the five-year Credit Default Swaps (CDS) premium values as of the date of the study, weekly data between the period of December 14, 2012 and February 11, 2022 are used to determine the effect of the risk level for short periods. The relationship between variables is examined using the Fourier Cointegration Test (FSHIN) cointegration test and the Dynamic Least Squares (DOLS) estimator. The findings show that country risk, exchange rate, and domestic currency deposit interest rates affect financial dollarization positively, while foreign currency deposit interest rates affect it negatively. The study carried out for Turkey sheds light on the factors that should be considered in high-risk countries facing the dollarization problem and presents policy recommendations for developing countries in this direction.

Keywords: Dollarization; Credit default swaps; Risk level; Monetary policy JEL Classification: C32; E43; E52; E58 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ist:journl:v:72:y:2022:i:2:p:625-651

DOI: 10.26650/ISTJECON2021-1191952

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