Currency substitution and exchange rate instability: The Turkish case

Does Currency Substitution Affect Exchange Rate Uncertainty? The Case of Turkey

“…We estimate in Table 1 that EGARCH parameter, which measures the degree of how persistent is the volatility shocks, is statistically significant and seems to be persistent so that the forecasts of the conditional variance converge to the steady state somewhat slowly. The leverage effect term, γ, denoted as C(6)*RESID(-1)/@SQRT(GARCH(-1)) in the output, is positive and statistically different from zero indicating that the news impact is asymmetric, thus, the existence of the leverage effect during Akçay et al (1997) in the sense that the higher the currency substitution the higher is the uncertainty attributed to the exchange rate return.…”

“…In this paper, our aim is to shed some light upon the possible effect of currency substitution on exchange rate uncertainty such as Akçay et al (1997), but by extending the time period till the end of 2006 as well as employing a sensitivity analysis considering two different time periods subject to structural changes in the Turkish economy. The next section highlights the methodological issues in estimation process.…”

Recent Experiences with Currency Substitution

“…For example, Mizen and Pentecost (1994) and Mongardini and Mueller (2000) use the treasury bill rate, and Akçay et al (1997) use the interbank offered rate. Clements and Schwartz (1993), Bahmni-Oskooee and Karacal (2006), and Kumamoto and Kumamoto (2008) use the deposit rate for the nominal interest rate.…”

“…Previous theoretical and empirical studies show that currency substitution could have significant effects on the independence of monetary policy and exchange rate stability under a flexible exchange rate system (e.g., Girton and Roper, 1981;Kareken and Wallace, 1981;Rogers 1990;Akçay, Alper, & Karasulu, 1997;Kumamoto & Kumamoto, 2004). For example, a high degree of currency substitution has been shown to cause the nominal interest rate to react strongly to even small monetary policy changes.…”

Currency substitution and financial crisis: lesson from a southeast emerging market

“…This paper will determine the relationship between currency depreciation and domestic money holding in Indonesia. This paper adopts the definition of currency substitution used by Calvo and Vegh (1992), Darrat et al (1996), Akcay et al (1997) and Adom et al (2009) focusing on the M2 definition of money as a proxy for currency substitution. These findings have important policy-related implications.…”