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

Year 2022, Volume: 72 Issue: 2, 625 - 651, 18.01.2023

Murat Eren Selim Başar Bengü Tosun

https://doi.org/10.26650/ISTJECON2021-1191952

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

Thanks

We would like to offer our special thanks to Assoc. Prof. Aycan Hepsağ for the WinRATS codes he developed and shared.

Yüksek Riskli Bir Ülkede Dolarizasyon ve Risk Primi: Türkiye Üzerine Bir İnceleme

Abstract

Gelişmekte olan ülkelerde dolarizasyonun neden olduğu deformasyonun öneminden yola çıkılarak geliştirilen bu çalışmada, para politikası, döviz kuru ve risk düzeyinin finansal dolarizasyon üzerindeki etkileri incelenmiştir. Çalışma tarihi itibariyle dünyanın en riskli ülkesi olan Türkiye için gerçekleştirilen araştırmada, risk seviyesinin kısa dönemler için etkisini belirlemek amacıyla haftalık veriler kullanılmıştır. Değişkenler arasındaki ilişki FSHIN eşbütünleşme testi ve DOLS tahmincisi kullanılarak incelenmiştir. Bulgular, ülke riski, döviz kuru ve yerli para mevduat faiz oranlarının finansal dolarizasyonu olumlu, yabancı para mevduat faiz oranlarının ise olumsuz etkilediğini göstermektedir. Makalenin özgünlüğü, yüksek riskli bir ülke için dolarizasyonun ekonomik göstergeler ve kısa dönemli riskler dikkate alınarak incelenmesinde yatmaktadır. Buna göre dolarizasyon, riskler ve ekonomi politikaları arasındaki ilişkiye ilişkin literatürdeki boşluğun doldurulması amaçlanmaktadır.

Keywords

Dolarizasyon, Kredi Temerrüt Takasları, Risk Seviyesi, Para Politikası

References

• Adeniji, S. (2013). Investigating the Relationship between Currency Substitution, Exchange Rate and Inflation in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach (MPRA Paper No. 52551). https://mpra.ub.uni-muenchen.de/52551 google scholar
• Aigheyisi, O. S., & Isikhuemen, A. H. (2019). Determinants of Currency Substitution in Nigeria. Empirical Economics Review, 9(1), 89-101. google scholar
• Alesina, A., & Barro, R. J. (2001). Dollarization. American Economic Review, 91(2), 381-385. https:// doi.org/10.1257/aer.91.2.381 google scholar
• Becker, R., Enders, W., & Lee, J. (2006). A stationarity test in the presence of an unknown number of smooth breaks. Journal of Time Series Analysis, 27(3), 381-409. https://doi. org/10.1111/j.1467-9892.2006.00478.x google scholar
• Bednarik, R. (2007). Loan dollarization in V4 countries (MPRA Paper No. 14695). https://mpra.ub.uni-muenchen.de/14695/1/BR_LoanDollarizationInV4Countries.pdf google scholar
• Broda, C., & Yeyati E. L. (2006). Endogenous deposit dollarization. Journal of Money, Credit and Banking, 38(4), 963-988. https://doi.org/10.2139/ssrn.532444 google scholar
• Burnside, C., Eichenbaum, M., & Rebelo S. (2001). Hedging and financial fragility in fixed exchange rate regimes. European Economic Review, 45(7), 1151-1193. https://doi.org/10.1016/S0014-2921(01)00090-3 google scholar
• Calvo, G. (2002). On dollarization. Economics of Transition. 10(2), 393-403. https://doi. org/10.1111/1468-0351.00117 google scholar
• Calvo, G., & Gramont, C. V. (1992). Currency Substitution in Developing Countries: An Introduction. IMF Working Papers 92/40. google scholar
• CBRT (2022). Electronic Data Delivery System of the Central Bank of the Republic of Turkey (CBRT). Retrieved February 11, 2022, from https://evds2.tcmb.gov.tr/index.php google scholar
• Civcir, I. (2005). Dollarization and its Long-run Determinants in Turkey. Money and Finance in the Middle East: Missed Oportunities or Future Prospects?, 6, 201-232. 10.1016/S1094-5334(05)06010-3 google scholar
• Cowan, K., & Do, Q-T. (2003). Financial dollarization and central bank credibility (The World Bank Policy Research Working Paper Series No. 3082). https://doi.org/10.1596/1813-9450-3082 google scholar
• De Nicolo, G., Honohan, P., & Ize, A. (2005). Dollarization of bank deposits: Causes and consequences. Journal of Banking & Finance, 29(7), 1697-1727. https://doi.org/10.1016/j. jbankfin.2004.06.033 google scholar
• Domaç, I., & Peria, M. S. M. (2003). Banking crises and exchange rate regimes: is there a link? Journal of International Economics, 61(1), 41-72. https://doi.org/10.1016/S0022-1996(02)00081-8 google scholar
• Dumrul, C. (2010). Türk Ekonomisinde Para İkamesinin Belirleyicilerinin Sınır Testi Yaklaşımı ile Eş-Bütünleşme Analizi. Erciyes Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 35, 199-231. google scholar
• Fabris, N., & Vujanovic, N. (2017). The Impact of Financial Dollarization on Inflation Targeting: Empirical Evidence from Serbia. Journal of Central Banking Theory and Practice, 6(2), 23-43. https://doi.org/10.1515/jcbtp-2017-0011 google scholar
• Hair, J. F., Black, W C, Babin B. J., & Anderson R. E. (2014). Multivariate Data Analysis. USA: Pearson Education Limited. google scholar
• Harvey, D. I., Leybourne, S. J., & Xiao, B. (2008). A powerful test for linearity when the order of integration is unknown. Studies in Nonlinear Dynamics & Econometrics, 12(3), 1-24. https://doi. org/10.2202/1558-3708.1582 google scholar
• Hekim, D. (2008). Para ikamesi histerisi: Türkiye örneği. Osmangazi Üniversitesi İİBF Dergisi, 3(1), 27-43. google scholar
• Honohan, P., & Shi, A. (2001). Deposit dollarization and the financial sector in emerging economies (The World Bank Policy Research, Working Paper Series No. 2748). https://doi. org/10.1596/1813-9450-2748 google scholar
• IADB (2004). Unlocking credit: The quest for deep and stable bank lending Economic and Social Progress in Latin America 2005 Report. Washington: Inter American Development Bank. google scholar
• Ize, A., & Yeyati, E. L. (1998). Dollarization of financial intermediation: Causes and policy implications (IMF Working Papers No. 98/28). https://www.imf.org/external/pubs/ft/wp/wp9828.pdf google scholar
• Ize, A., & Yeyati, E. L. (2003). Financial dollarization. Journal of International Economics, 59(2), 323-347. google scholar
• Jeanne, O. (2003). Why do emerging market economies borrow in foreign currency? (IMF Workig Papers No. 03/177). https://www.imf.org/external/pubs/ft/wp/2003/wp03177.pdf google scholar
• Katyaayun, U., & Krause, A. (2017). Credit Ratings and Credit Default Swaps During the European Sovereign Debt Crisis (SSRN Paper No.3078630). http://dx.doi.org/10.2139/ssrn.3078630 google scholar
• Komárek, L., & Melecky, M. (2003). Currency substitution in a transitional economy with an application to the Czech Republic. Eastern European Economics, 41(4), 72-99. https://doi.org/10. 1080/00128775.2003.11041054 google scholar
• Kwiatkowski, D., Phillips, P.C., Schmidt, P. & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of econometrics, 54(1-3), 159-178. https://doi.org/10.1016/0304-4076(92)90104-Y google scholar
• Lay, S. H., Kakinaka, M., & Kotani, K. (2012). Exchange rate movements in a dollarized economy: The case of Cambodia. ASEAN Economic Bulletin, 29(1), 65-78. https://doi.org/10.1353/ ase.2012.0005 google scholar
• Neanidis, K. C., & Savva, C. S. (2009). Financial dollarization: Short-run determinants in transition economies. Journal of Banking & Finance, 33(10), 1860-1873. https://doi.org/10.1016/j. jbankfin.2009.04.017 google scholar
• Olayungbo, D. O., & Ajuwon, K. T. (2015). Dollarization, inflation and interest rate in Nigeria. CBN Journal of Applied Statistics, 6(1), 241-261. google scholar
• Ponomarenko, A., Solovyeva, A., & Vasilieva, E. (2013). Financial dollarization in Russia: causes and consequences. Macroeconomics and Finance in Emerging Market Economies, 6(2), 221-243. https://doi.org/10.2139/ssrn.1978416 google scholar
• Rodríguez, I. M., Dandapani, K., & Lawrence, E. R. (2019). Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings? Financial Management, 48(1):229-256. https:// doi.org/10.1111/fima.12223 google scholar
• Rosenberg, C. B., & Tirpak, M. (2008). Determinants of foreign currency borrowing in the new member states of the EU (IMF Working Papers No. 08/173). https://www.imf.org/en/Publications/WP/ Issues/2016/12/31/Determinants-of-Foreign-Currency-Borrowing-in-the-New-Member-States-of-the-EU-22148 google scholar
• Savastano, M. A. (1996). Dollarization in Latin America: Recent evidence and some policy issues (IMF Working Papers No. 96/4). https://www.imf.org/en/Publications/WP/Issues/2016/12/30/ Dollarization-in-Latin-America-Recent-Evidence-and-Some-Policy-Issues-1947 google scholar
• Serdengeçti, S. (2005). Dolarizasyon/Ters Dolarizasyon [TCMB Presentation]. Retrieved November 10, 2022, from https://www.tcmb.gov.tr/wps/wcm/connect/5b404bcd-6e72-415d-a656- google scholar
• 91da6db0cc6e/sunumeskisehir.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-5b404bcd-6e72-415d-a656-91da6db0cc6e-m3fBeXh google scholar
• Shin, Y. (1994). A residual-based test of the null of cointegration against the alternative of no cointegration. Econometric Theory, 10(1), 91-115. https://doi.org/10.1017/S0266466600008240 google scholar
• Srithilat, K., Sun, G., Chanthanivong, T., & Thavisay, M. (2018). The relationship between inflation, exchange rate, and currency substitution: Evidence from panel vector error correction model approach. International Journal of Economics and Financial Issues, 8(2), 79-84. google scholar
• Tsong, C-C., Lee, C-F., Tsai, L-J., & Hu, T-C. (2016). The Fourier approximation and testing for the null of cointegration. Empirical Economics, 51(3), 1085-1113. https://doi.org/10.1007/s00181-015-1028-6 google scholar
• Vieira, F. A., Holland, M., & Resend, M. F. (2012). Financial dollarization and systemic risks: New empirical evidence. Journal of International Money and Finance, 31(6), 1695-1714. https://doi. org/10.1016/j.jimonfin.2012.03.007 google scholar
• Webb, R., & Armas, A. (2004). Monetary policy in a highly dollarized economy: the case of Peru. In P. C. Ugolini, A. Schaechter, & M. R. Stone, (Eds.), Challenges to Central Banking from Globalized Financial Systems (pp. 15-37). Washington: IMF Publication Services. google scholar
• WGB (2022). Sovereign CDS. Retrieved February 11, 2022, from http://www.worldgovernmentbonds. com/sovereign-cds/ google scholar
• Yaz, D. A. (2020). Antik Çağdan Geleceğe Para. İstanbul: Timaş Yayınevi. google scholar
• Yeyati, E. L. (2003). Financial Dollarization: Where Do We Stand? In: Conference on Financial Dedollarization: Policy Options. IDB/World Bank. google scholar
• Yeyati, E. L. (2006). Financial dollarization: evaluating the consequences. Economic Policy, 21(45), 62118. https://doi.org/10.1111/j.1468-0327.2006.00154.x google scholar
• Yeyati, E. L., Sturzenegger, F., & Tella, D. (2002). Dollarization: A Primer. In E. Yeyati, & F. Sturzenegger (Eds.), Dollarization Debates and Policy Alternatives. London:The MIT Press. google scholar
• Yılancı, V. (2017). Petrol Fiyatları ile Ekonomik Büyüme Arasındaki İlişkinin İncelenmesi: Fourier Yaklaşımı. Ekonometri ve Istatistik Dergisi, (27), 51-57. google scholar
• Yinusa, D. O. (2009). Macroeconomic fluctuations and deposit dollarization in sub-Saharan Africa: evidence from panel data (MPRA Paper No. 16259). https://mpra.ub.uni-muenchen.de/16259/ google scholar