Currency Substitution Hysterisis: The Case of Turkey

The main issue in this paper is to analyze the determinants and the hysteresis in currency substitution process in which foreign money replaces the domestic one. With this issue, the currency substitution process has been analyzed respect to the composite index. Factors affecting currency substitution have been explained with an empirical model composing of 1992:01 - 2007:12. Inflation, real exchange rates have been determined as the main factors. According to the empirical model in fact hysteresis has a statistical significant; it is conflicting with our theoretical explanations. With respect to these findings, in order to reverse currency substitution process; stability should be sustained and extended to all sectors of the economy and the inflation should be reduced.