The asymmetric effect of foreign ownership and concentration on financial dollarization: the case of the Turkish economy

Abstract

The Turkish economy is fragile and exhibits high exchange rate volatility, and financial dollarization is chronic in this country. Thus, this study explores the asymmetric effect of foreign ownership and concentration on financial dollarization in Turkey. The study covers 2004: Q1–2020: Q2 quarterly period and determines the asymmetric relationship between foreign ownership and concentration on financial dollarization. The nonlinear autoregressive distributed lags (NARDL) model is used as a main model and the autoregressive distributed lags (ARDL) model, the Bayesian vector autoregression (BVAR) model, and the standard vector autoregression (VAR) model are employed for robustness checks. The NARDL model shows that concentration, exchange rate, foreign ownership, inflation, and GDP growth rates are effective factors in influencing deposit dollarization. The study confirms that positive (negative) shocks in concentration have a significant and positive (negative) effect on deposit dollarization in the short run. Also, the standard VAR model performs better than the BVAR model and the ARDL model and standard VAR model give approximately similar results to the NARDL model. These findings imply that speculative trading can be considered the cause of deposit dollarization and credit dollarization for Turkey, and domestic citizens do not dollarize the deposits to protect their wealth. Credit dollarization increases even if both positive and negative shocks happen to foreign ownership and concentration since credit dollarization may be seen as a hedging mechanism for the banking system in a high-inflation environment.