Macroeconomic Determinants of Dollarization

Abstract

The dollarization phenomenon, which generally means the substitution of local currency or assets with foreign equivalents and which is important for developing countries has been the subject of many economic analyses and discussions, especially in the fields of monetary theory and finance, and the factors affecting this phenomenon have been investigated both for country groups and for individual countries. In this thesis, the macroeconomic determinants of dollarization are investigated by panel ARDL method on a sample including mostly developing countries. As a result of the empirical analysis, findings are obtained for the whole sample in the long run and for each country in the short run. According to the results, in the long run, inflation rate, export to import coverage ratio, exchange rate volatility and economic freedom index have a statistically significant and positive effect on dollarization. The effects of GDP growth rate and interest rate are also statistically significant but negative. The results of the analyses for the entire dataset show that none of the variables has a statistically significant effect in the short run. However, it is also found that there will be a reorientation towards the long-run coefficient estimates after a short-term shock. The results of the short-run analyses differ for each country. It is observed that the short-run coefficient estimates for some countries are statistically insignificant. In addition, the statistically significant coefficients are found to affect the dollarization level of countries in different directions.