Reflections on recent trends in deposit dollarization in Turkey

Abstract

Deposit dollarization is high in Turkey with more than half of all banking sec-tor deposits denominated in foreign currency. While a rising trend in deposit dollarization has been in place during the last ten years, this has gained further momentum recently. The objective of this study is to analyze the recent trends in deposit dollarization in Turkey within the framework of policies undertaken and investigate its potential drivers that are under the influence of monetary policy. Estimation results obtained using the deposit dollarization shares that are and are not adjusted for the mechanical impact of the exchange rate changes provide di˙erent assessments of the drivers of dollarization in Turkey. In this sense, some estimation results obtained using the unadjusted deposit dollarization share sug-gesting that it has been associated with the exchange rate and exchange rate expectations might be misleading regarding the changes in the demand for for-eign currency over domestic currency deposits to the extent what these results capture is the mechanical impact of exchange rate movements on the deposit dollarization share.