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Dollarization and Monetary Transmission in
Turkey Erdem BASÇI
Vice Governor
Central Bank of Turkey
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Asset Dollarization
Share of FX-Denominated Deposits in Total Deposits
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Monetary Policy
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Monetary Transmission

• 1) Exchange rate channel
• Direct
• Indirect
• 2) Credit channel
• 3) Expectations channel

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Monetary Transmission

• 1) Exchange rate channel
• Direct
• Indirect
• 2) Credit channel
• 3) Expectations channel

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Exchange Rate Channel (Direct) Pass-Through - 1

• Pass-through to CPI is reduced to a large extent
  under float.

Cumulative Exchange Rate Pass-Through to Consumer
Inflation VAR Evidence
Source Kara and Ögünç (2005)
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Exchange Rate Channel (Direct) Pass-Through - 2

• Especially pass-through to non-tradables is
  diminished considerably under the floating
  exchange rate regime

Indexation Behavior Pass-Through Coefficient in
Tradables vs. Non-Tradables
Source Kara et al (2005)
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Monetary Transmission

• 1) Exchange rate channel
• Direct
• Indirect
• 2) Credit channel
• 3) Expectations channel

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Exchange Rate Channel (Indirect)
Time-Varying Impact of a Real Exchange Rate
Appreciation on Demand
Source Sarikaya et al (2005)
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Exchange Rate Channel (Indirect) Liability
Dollarization of Firms - 1
Non-Bank Firm FX Position
Nominal (Million US Dollar)
Related Ratios (Percentage)
Source CBRT (2006)
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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)

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Monetary Transmission

• 1) Exchange rate channel
• Direct
• Indirect
• 2) Credit channel
• 3) Expectations channel

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Credit Channel Interest on Demand
Source Sarikaya et al (2005)
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Credit Channel Demand on Inflation
Source Sarikaya et al (2005)
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Credit Channel Total Loans
Private Sector Credits/GDP
Source CBRT (2006)
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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. (Aydin, 2006)

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Credit Channel Consumer Loans - 2
Real Quarterly Percentage Change Real Quarterly Percentage Change Real Quarterly Percentage Change Real Quarterly Percentage Change Real Quarterly Percentage Change Real Quarterly Percentage Change Real Quarterly Percentage Change
2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3
Consumer Loans 23.4 23.3 18.6 18.7 24.3 3.2
i) Housing 61.9 50.6 38.1 30.8 27.2 2.6
ii) Automobile 11.7 11.4 9.9 3.2 8.9 -4.8
iii) Other 11.7 11.3 5.3 13.1 28.7 7.8
Credit Cards 8.4 6.3 6.0 3.2 10.6 3.8
Source CBRT Source CBRT Source CBRT Source CBRT Source CBRT Source CBRT Source CBRT

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Monetary Transmission

• 1) Exchange rate channel
• Direct
• Indirect
• 2) Credit channel
• 3) Expectations channel

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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
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Expectations Channel - 2
Credibility Gap (End Year)
Source CBRT
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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
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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 Akinci et al (2006)
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Conclusion

• 1) Exchange rate channel
• Direct
• Indirect
• 2) Credit channel
• 3) Expectations channel
• are all affected by the absence or presence of
  dollarization.

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• Thank you

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Dollarization and Monetary Transmission in
Turkey Erdem BASÇI
Vice Governor
Central Bank of Turkey