Durmuş Yilmaz: Dollarization – consequences and policy options Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at a Conference on “Dollarization”, Istanbul, 14 December 2006. *  *  *  Distinguished Governors, Academicians and Guests, I would like to welcome you all to the conference entitled “Dollarization: Consequences and Policy Options”. I would also like to thank you for sharing your precious knowledge and experiences with us. As this conference is one of the activities organized in the context of the 75th anniversary of the Central Bank of Turkey, it gives me an honor to give the start for it. Before continuing with my speech, I would like to comment on the motives that lie behind the topic of this conference. Although we have never had hyperinflation, we, in Turkey, experienced high and chronic inflation for the past almost 30 years before 2001. Living long years with chronic inflation led to huge losses in the credibility of our national currency, which is important for us as an institution responsible for issuing banknotes and maintaining stability of the money. In this sense, it will be appropriate indeed to discuss dollarization in depth, I believe. Given the wide range of issues related to dollarization and the limited time available, I will make some brief remarks on the concept of dollarization in general and touch upon the Turkish experience in particular. Dear Guests, Dollarization has evolved as one of the noteworthy features of globalization during the last two decades.
In such a case, the policy makers are left in a big trade off between monetary policy independence and balance sheet mismatches 7 . Obviously, there is not one single commonly accepted solution for all countries. Nevertheless, country experiences in recent years have shown us that there is a tendency in choosing more flexible exchange rate regimes under the assumption that vulnerabilities regarding mismatch problems are accurately hedged. Subsequently, dollarization affects monetary policy through the increased volatility of money demand. Thus, the traditional transmission of monetary policy would not work properly as central banks have no direct control over foreign currency assets. Accordingly, as Kevin Cowan and his colleague 8 mentioned in their study, dollarization limits the capacity of central banks to conduct stabilizing monetary policy in the short run and to a large extent limits the ability of monetary authority gain credibility in the long run. Distinguished Guests, Having given a brief introduction into the notion of dollarization, now I would like to talk about the Turkish case. As in the evidence of the other countries, the dollarization in Turkey also took its roots from macroeconomic instability with fixed or predictable exchange rate regimes, inefficient market regulations and the lack of credibility of economic policies. In order to comprehend the dollarization in Turkey better, it would be reasonable to look at the macroeconomic instability and examine the evolution of dollarization in a historical perspective.