Liability dollarization, exchange market pressure and fear of floating: empirical evidence for Turkey

Abstract

The objective of this article is to examine the relationship between liability dollarization and the Exchange Market Pressure (EMP) in Turkey within an Autoregressive Distributed Lag (ARDL) and Granger causality framework using monthly data from 1991:12 to 2006:08. The findings suggest that there exists a long-term equilibrium relationship between EMP and liability dollarization, where liability dollarization Granger causes EMP both in the short-and long-run, with no evidence of reverse causality. This suggests that the predominance of foreign currency liabilities in the banks' balance sheets in Turkey induces a selling pressure in the exchange market as well as a fear of floating.