GMM estimation of currency substitution in a high-inflation economy: evidence from Turkey

Abstract

This paper shows that currency substitution is a first-order importance in a high inflation economy like Turkey. A money-in-the-utility function model is estimated and tested using Hansen's Generalized Method of Moments procedure. The results show that elasticity of substitution between the Turkish Lira and the US dollar is high and statistically significant. The estimate of the share of foreign balances in producing domestic money services is considerably large and statistically significant.