Macroeconomic and Financial Determinants of Deposit Dollarization in Turkey: An ARDL-Based Review

Abstract

Purpose – The aim of this study is to identify the macroeconomic and financial determinants of deposit dollarization in Türkiye and to analyze the long-run dynamics of foreign currency demand. By examining the effects of inflation, geopolitical risk, financial development, energy trade, CDS premiums, exchange rates, and policy interest rates on dollarization within a comprehensive framework, the study seeks to contribute to the existing literature.
Design/methodology/approach – Using monthly data for the period 2013M08–2025M04, an Autoregressive Distributed Lag (ARDL) model was constructed following Pesaran and Shin (1998). The long-run relationships among the variables were analyzed using the bounds testing approach developed by Pesaran, Shin, and Smith (2001).
Results – The results indicate the existence of a statistically significant long-run cointegration relationship between dollarization and macroeconomic as well as financial variables. In the long run, financial development, CDS premiums, and policy interest rates are found to increase dollarization, while the effects of the remaining variables are not statistically significant. According to the error correction term (ECT) coefficient, approximately 7.8% of the deviations from equilibrium are corrected in each period, indicating that the model converges to its long-run equilibrium in a stable manner.
Discussion – The findings suggest that deposit dollarization in Türkiye operates through a multidimensional mechanism shaped by both macroeconomic instability and institutional and financial vulnerabilities. The fact that financial deepening increases rather than reduces dollarization points to a significant risk area for policymakers. The results highlight the need to simultaneously strengthen price stability, confidence channels, and the institutional framework in order to achieve effective dedollarization.