Financial dollarization in the Turkish economy: “the portfolio view”

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2011
Serdaroğlu, Tuncay
The purpose of this study is to analyze financial dollarization phenomenon in the Turkish economy since the beginning of 1990’s based on Ize and Levy Yeyati’s (2003) minimum variance portfolio (MVP) framework. Financial dollarization, steamed by unfavorable macroeconomic conditions and uncertainties, is revealed by the experiences of recent banking and financial crisis as carrying significant drawbacks such that it complicates economic policy implementation and contains the seeds of fragility for the whole economy as well. Although, considerable progress has been achieved in reducing inflation levels and sustaining macroeconomic stability, financial dollarization displays rather an enduring stance. MVP approach is based on optimizing the currency composition of financial contracts depending on the risk and the return profile of agents’ portfolios. According to this approach, financial dollarization is an increasing function of the inflation volatility and a decreasing function of the real exchange rate volatility. In line with this framework, financial dollarization in the Turkish economy during 1990-2011 period is studied by also considering other important macroeconomic risk indicators and it is tried to shed some light on the success of inflation targeting policy in dealing with dollarization phenomenon.
Citation Formats
T. Serdaroğlu, “Financial dollarization in the Turkish economy: “the portfolio view”,” M.S. - Master of Science, Middle East Technical University, 2011.