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Dollarization and Monetary Transmission in Turkey Erdem BAŞÇI Vice Governor Central Bank of Turkey. Asset Dollarization. Share of FX-Denominated Deposits in Total Deposits. Monetary Policy. Monetary Transmission. 1) Exchange rate channel
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Dollarization and Monetary Transmission in Turkey Erdem BAŞÇI Vice Governor Central Bank of Turkey
Asset Dollarization Share of FX-Denominated Deposits in Total Deposits
Monetary Transmission 1) Exchange rate channel • Direct • Indirect 2) Credit channel 3) Expectations channel
Monetary Transmission 1) Exchange rate channel • Direct • Indirect 2) Credit channel 3) Expectations channel
Pass-through to CPI is reduced to a large extent under float. Exchange Rate Channel (Direct): Pass-Through - 1 Cumulative Exchange Rate Pass-Through to Consumer Inflation: VAR Evidence Source: Kara and Öğünç (2005)
Especially pass-through to non-tradables is diminished considerably under the floating exchange rate regime Exchange Rate Channel (Direct) Pass-Through - 2 Indexation Behavior: Pass-Through Coefficient in Tradables vs. Non-Tradables Source: Kara et al (2005)
Monetary Transmission 1) Exchange rate channel • Direct • Indirect 2) Credit channel 3) Expectations channel
Exchange Rate Channel (Indirect) Time-Varying Impact of a Real Exchange Rate Appreciation on Demand Source: Sarıkaya et al (2005)
Exchange Rate Channel (Indirect): Liability Dollarization of Firms - 1 Non-Bank Firm FX Position Nominal (Million US Dollar) Related Ratios (Percentage) Source: CBRT (2006)
Exchange Rate Channel (Indirect): Liability Dollarization of Firms - 2 • Firms only partially match the currency composition of their debt with their income streams, which makes them potentially vulnerable to balance sheet affects of exchange rate depreciations. Consistent with this argument, real exchange rate depreciations are found to be contractionary, in terms of investments and profits, for sectors with higher liability dollarization. (Kesriyeli et al, 2005)
Monetary Transmission 1) Exchange rate channel • Direct • Indirect 2) Credit channel 3) Expectations channel
Credit Channel: Interest on Demand Source: Sarıkaya et al (2005)
Credit Channel: Demand on Inflation Source: Sarıkaya et al (2005)
Credit Channel: Total Loans Private Sector Credits/GDP Source: CBRT (2006)
Credit Channel: Consumer Loans - 1 • While corporate loans are relatively less sensitive to policy rates, the long-term pass-through on cash and automobile loans is one-for-one and on housing loans is more than one for one. (Aydın, 2006)
Monetary Transmission 1) Exchange rate channel • Direct • Indirect 2) Credit channel 3) Expectations channel
Expectations Channel - 1 • The outstanding disinflation performance for four consecutive years contributed to the credibility accumulation of the CBRT. Inflation Targets and Realizations Source: CBRT
Expectations Channel - 2 Credibility Gap (End Year) Source: CBRT
Expectations Channel - 3 Credibility Gap (December 2006 Survey) • End Year: 9,9 % • 12 Months Ahead: 7,2 % • 24 Months Ahead: 5,6 % • Target (2007-9) 4,0 % Source: CBRT
Expectations Channel - 4 • The effectiveness CBRT policy decisions on expectations can be gauged using yield curves. The monetary tightening on June 7, 2006 where the CBT raised the short-term policy rate from 13.25 to 15 has been successful in even to the extent of reducing long-term bond yields mainly due to improved medium-term inflation expectations Yield Curve Response to Recent Policy Tightening Source: Akıncı et al (2006)
Conclusion 1) Exchange rate channel • Direct • Indirect 2) Credit channel 3) Expectations channel … are all affected by the absence or presence of dollarization.
Dollarization and Monetary Transmission in Turkey Erdem BAŞÇI Vice Governor Central Bank of Turkey