On the Link between Dollarisation and Inflation: Evidence from Turkey1

Mohsen Bahmani-Oskooee and Ilker Domac

Comparative Economic Studies, 2003, vol. 45, issue 3, 306-328

Abstract: This 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

Date: 2003
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