and safety nets in foreign currency such as deposit insurance can all be evaluated under this framework. due to those imperfections, moral hazard problems arise and this in turn results in a larger demand for foreign currency. as the studies 3 have showed, the low quality of legal and political institutions and the lack of legal protection for domestic creditor provide incentives for dollarization. dear guests, now, the question is why we should care about dollarization. before anything else, it increases a country ’ s vulnerability to shocks. let me also mention the vulnerabilities of two major sectors in an economy : one arising from dollarization in private sector and the other one having to do with dollarized public debt dynamics. beginning with the private sector, the dollarized financial systems and the companies ’ balance sheets are obviously exposed to solvency risks, due to currency mismatch problem. keeping in mind that the risks for both financial and real sectors are interrelated, the banks that lend in foreign currency to firms, which earn revenues in domestic currency, are also indirectly affected. in such cases, the whole economy becomes more vulnerable to shocks due to amplified risks resulting from dollarization. a recent strand of literature and country cases such as the asian meltdown of 1997 and the 2000 - 2001 banking crisis in turkey, have all emphasized the importance of such vulnerabilities brought about by dollarization. moreover, firms adjust their prices more frequently in a dollarized economic environment where depreciation of national currency is perceived as permanent. thus, dollarization leads to higher pass through effect from exchange rates to prices via deteriorating pricing behaviour of firms. ultimately, from the public sector ’ s point of view, the issue of debt sustainability is highly influenced by dollarization. in fact, public sector is exposed to problems similar to that of non - trading firms indebted in foreign currency 4. there is no doubt that dollarized debt adversely affects government ’ s solvency as its assets are in domestic currency. in this sense, given the high level of dollarization, the fluctuations in real exchange rate might turn an apparently sustainable fiscal situation into an unsustainable one. furthermore, public sector insolvency can immediately lead to banking sector insolvency if domestic banking system holds large claims against government. dear guests, before continuing with the turkish experience, i have to add that dollarization deserves a special attention from a central banker ’ s perspective. as we all know, the choice of exchange rate regime is

hafize gaye erkan : recent economic and financial developments in turkey speech by dr hafize gaye erkan, governor of the central bank of the republic of turkey, at the briefing on inflation report 2023 - iii, ankara, 27 july 2023. * * * distinguished members of the press, esteemed participants, welcome to our third inflation report briefing of 2023. i would like to extend my respect and greetings to you, who joined our meeting today, and all our online participants. before starting my presentation, i would like to emphasize that the primary objective of the central bank is price stability. we embarked on a monetary tightening process to bring inflation down permanently. we will further strengthen monetary tightening as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved. we are closely monitoring indicators for inflation and underlying trend of inflation. we will continue to decisively use all our tools in line with the main objective of price stability. accordingly, in addition to the rate hike, we have taken decisions on selective credit tightening and quantitative tightening to support the monetary tightening process, and will continue to do so. therefore, my speech and the following q & a session will focus solely on inflation and monetary policy. we are in a transition heading towards the disinflation and stabilization periods we have envisaged. during this transition, markets are being stabilized within their own internal dynamics. inflation will rise temporarily in the short run in response to the correction in exchange rates and the measures regarding fiscal discipline. in the meantime, we are carefully laying the groundwork for a sustainable start of disinflation in 2024. we will begin to feel some of the cumulative positive effects of our rate hike decisions, along with our quantitative and selective tightening decisions in late 2023 and particularly in the underlying trend of inflation in the second quarter of 2024. once we enter the period of disinflation process, temporary corrections in relative prices will be replaced by exchange rate stability, improved current account balance, fiscal discipline, permanent strengthening in capital flows and increased reserves. as a result, underlying trend of inflation and expectations will improve consistently. 1 / 11 bis - central bankers'speeches we see post - 2025 as the beginning of a period of stability. during this period, disinflation will accelerate and predictability will increase. permanent disinflation will be accompanied by investments and qualified growth. in my briefing, i will first share with you