Investigating the Time Varying Nature of the Link between Inflation and Currency Substitution in the Turkish Economy

This study investigates the relationship between the rate of inflation and the degree of the currency substitution for Turkey during 1986-2006. Our results show that the correlation coefficient between the two variables has not been constant over time. The results of the Multivariate GARCH model estimated to obtain the correlation coefficients indicate that there is a nonlinear relationship between the inflation rate and the degree of currency substitution. The main policy implication of our study is that it is difficult to stop or to reverse the currency substitution unless a confidence in the domestic currency is established.