The application of risk analysis to the appraisal of optional investment in the electricity supply industry

Although currency substitution is a widely observed phenomenon in both developed and developing counries, most of the studies on currency substitutioin in small open economies have focused on high inflatin South American countries. This paper extends the previous analysis to a newly industrializing, high-inflation economy, namely Turkey. A vector autoregression model has beeb estimated employing the certain policy variables to investigate the dynamics of currency substitution in the economy. Dynamic impulse responses show that the residents have a preference for substitutiong foregn currencies for domestic currency because of reawl-exchange-rate depreciations. The results suggest that to stop or to reverse the on-going currency substition process a plicy aiming to increase the expected real return on domestic assets should be adopted.