The Role of Financial Deepening and Dollarization in the Effectiveness of Monetary Policy: Evidence from Turkey (2010–2024)

Bari B.

RSEP 2025, New York, United States Of America, 15 - 17 October 2025, pp.1-2, (Summary Text)

  • Publication Type: Conference Paper / Summary Text
  • City: New York
  • Country: United States Of America
  • Page Numbers: pp.1-2
  • Anadolu University Affiliated: Yes

Abstract

This paper examines the impact of financial deepening and dollarization on the effectiveness of monetary policy in Turkey from 2010 to 2024. We assemble a monthly series from official sources to construct (i) a composite Financial Deepening Index (FDI) capturing bank intermediation and market depth, and (ii) a Dollarization Index (DI) based on foreign-currency deposit and credit shares. Monetary policy shocks are identified via high-frequency changes in interest-rate expectations around MPC announcements, and, as a robustness check, with narrative sign-restricted VARs. Using state-dependent local projections and a TVP-VAR, we estimate impulse responses of output, prices, credit, and the exchange rate to a contractionary policy shock under varying FDI and DI regimes. Results indicate that deeper financial systems amplify the transmission through credit and interest-rate channels, thereby shortening the time to peak disinflation. In contrast, higher dollarization weakens the pass-through to lending rates and inflation, but heightens exchange-rate sensitivity. Counterfactuals suggest that reducing dollarization to its 2013–2014 levels would have increased the peak disinflation effect by 20–30% and reduced exchange-rate overshooting. Our findings emphasize the importance of complementary macro-financial policies—de-dollarization measures and capital market development—to restore the effectiveness of interest-rate policy in high-inflation, partially dollarized economies.