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This chapter explains dollarization process in Turkey by an extended portfolio model where dollarization is determined by the relative rates of return of domestic and foreign currencies denominated assets, expected change in the exchange rate, exchange rate risk, and credibility of current economic policies. The econometrics results are in line with the intuitive predictions of the model. We have found that interest rate differential and the expected exchange rates are the dominant variables in determining dollarization. This chapter also provides evidence of inertia in the process of dollarization in Turkey.

This chapter contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one-third of the long-horizon forecast error variance of output growth, and about one-fifth of the long-run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross-country average of the median debt elasticity is 1.45 when the rise in output is due to a fiscal expansion as compared to 0.76 when the rise in output follows from a favorable output shock.

Deficits in fiscal and current account balances in a large number of countries reveal interesting implications of the causal relationship between internal and external imbalances. Empirical evidence about the occurrence of so-called twin deficits or twin surpluses provides crucial information about the validity of an intertemporal approach. However, most recent dynamic cyclical changes during the crisis period revealed many questions about the direct interconnection between macroeconomic performance and twin imbalances. In the paper we observe substantial features of twin imbalances in European transition economies. Event study (identification of large fiscal and current account changes and their parallel occurrence) and vector auto-regression methods will be employed to examine key aspects of twin imbalances. Our results suggest that current account deteriorations were predominately associated with negative public investment and savings balances (fiscal deficits), while current account improvements were predominately associated with positive private investment and savings balances, confirming empirical evidence about twin deficits in European transition economies.

After the 2008 global financial crisis, the world has been through an improving economic integration. The scale of RMB cross-border transaction flows expands as well. Countries around China are gradually accepting the RMB as a means of trading and investing. Nowadays, the phenomenon of RMB substitutes the currencies of neighboring countries has become more and more widespread. As a frontier region for China's opening up to the outside world, Hong Kong's financial market is highly transparent with perfect infrastructures. The completion of the Hong Kong offshore RMB market leads to a rise of the RMB stock in Hong Kong, so there is a clear phenomenon of RMB substituting Hong Kong dollars (HKDs) in Hong Kong. This paper studies the substitution effect of RMB and HKD from both theoretical and empirical aspects, and puts forward policy recommendations based on the research results.