THE DETERMINANTS OF CURRENCY SUBSTITUTION IN TURKISH ECONOMY: A BOUND TESTING APPROACH TO COINTEGRATION

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This paper analyzes the relationships between currency substitution, trade openness, expected real exchange rate, expected inflation rates and interest rate differentials between Turkey and USA. It also especially examines central bank s gross foreign exchange reserves in the analysis. The bound test approach is applied in the analysis between 1988 and 2009 for Turkish economy. The findings show that, in the long run, all the variables have positive impact on currency substitution. The analysis indicates that all variables are significant at the 10 percent level and with the expected sign, except for trade openness. The main policy implication that follows from this study is that central bank s gross foreign exchange reserves are important to prevent currency substitution.

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Currency Substitution , Turkish Economy , Lee , Strazicich Unit Root Test , Bound Test

Erciyes University Journal Of Economics an‎d Administrative Sciences

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Erciyes University Journal Of Economics an‎d Administrative Sciences