Corporate sector liability dollarization and exchange rate balance sheet effect in Turkey

In this study, we investigate the causes and balance sheet effect consequences of Liability Dollarization (LD) of nonfinancial sectors in Turkey. The dynamic panel data Generalized Method of Moments (GMM) results suggest that both sector specific and macroeconomic variables are significant in explaining the corporate sector LD. Industries appear to partially match the currency composition of their debt with their income streams. Devaluations are found to be contractionary, in terms of investments and profits, for sectors with higher LD. Macroeconomic instability affects the performance of the industries negatively. Our results also stress the importance of strong macroeconomic policy stance for an endogenous dedollarization process.