{
  "title": "Exchange Rate Movements, Inflation Expectations, and Currency Substitution in Turkey",
  "publication": "IMF Working Papers, November 1, 1995",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/exchange-rate-movements-inflation-expectations-and-currency-substitution-in-turkey-1970",
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  "summary": "This paper contains an empirical analysis of currency substitution in Turkey: a simple relationship between the share of foreign currency holdings in M2X on one side and movements in the exchange rate or inflation on the other is derived from a two-stage portfolio choice model.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Empirical analysis of currency substitution in Turkey derived from a two-stage portfolio choice model.\n- A simple relationship is derived between:\n  - the share of foreign currency holdings in M2X, and\n  - movements in the exchange rate or inflation.\n- Estimation method: band spectrum regression, which allows removal of short-term cyclical components.\n- Main result: the relationship between currency substitution depends mainly on long-term movements in the exchange rate.\n- Inflation’s effect on currency substitution is not statistically significant."
    },
    {
      "heading": "Methodology",
      "content": "- Theoretical framework: two-stage portfolio choice model linking currency composition of money holdings to exchange rate movements and inflation.\n- Empirical approach: band spectrum regression to filter out short-term cyclical components from the data.\n- Key variables: share of foreign currency holdings in M2X, exchange rate movements, inflation (and inflation differentials as relevant)."
    },
    {
      "heading": "Findings",
      "content": "- Currency substitution in Turkey is driven primarily by long-term exchange rate movements.\n- The effect of inflation on currency substitution is not statistically significant in the estimated relationship.\n- Short-term cyclical components are removed using band spectrum regression to focus on long-term dynamics."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Policies aimed at reducing currency substitution should consider mechanisms that stabilize long-term exchange rate expectations.\n- Relying solely on inflation control may be insufficient to reduce foreign currency holdings if exchange rate expectations remain unfavorable.\n- Nominal anchors and measures influencing long-term exchange rate credibility could be more effective in affecting currency composition of M2X than policies targeting inflation alone.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/exchange-rate-movements-inflation-expectations-and-currency-substitution-in-turkey-1970"
    }
  ],
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    "Authors: Fabio Scacciavillani",
    "Published: November 1, 1995",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451853414.001",
    "Empirical analysis of currency substitution in Turkey derived from a two-stage portfolio choice model.",
    "A simple relationship is derived between:",
    "Estimation method: band spectrum regression, which allows removal of short-term cyclical components.",
    "Main result: the relationship between currency substitution depends mainly on long-term movements in the exchange rate.",
    "Inflation’s effect on currency substitution is not statistically significant.",
    "Theoretical framework: two-stage portfolio choice model linking currency composition of money holdings to exchange rate movements and inflation.",
    "Empirical approach: band spectrum regression to filter out short-term cyclical components from the data.",
    "Key variables: share of foreign currency holdings in M2X, exchange rate movements, inflation (and inflation differentials as relevant).",
    "Currency substitution in Turkey is driven primarily by long-term exchange rate movements.",
    "The effect of inflation on currency substitution is not statistically significant in the estimated relationship.",
    "Short-term cyclical components are removed using band spectrum regression to focus on long-term dynamics.",
    "Policies aimed at reducing currency substitution should consider mechanisms that stabilize long-term exchange rate expectations.",
    "Relying solely on inflation control may be insufficient to reduce foreign currency holdings if exchange rate expectations remain unfavorable.",
    "Nominal anchors and measures influencing long-term exchange rate credibility could be more effective in affecting currency composition of M2X than policies targeting inflation alone."
  ],
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