This study analyzes the relationship between macroeconomic distress and financial dollarization in Türkiye using annual regional panel data for 26 Nomenclature of Territorial Units for Statistics 2 regions over the period 2005–2021. Macroeconomic distress is captured using the misery index, computed as the compound of inflation and unemployment rates, while the share of foreign-currency-denominated deposits in total deposits measures financial dollarization. Applying second-generation panel econometric models that account for regional heterogeneity, we investigate both long-run equilibrium relationships and short-run interactions. Panel cointegration tests show a long-run connection between macroeconomic distress and dollarization. Short-run effects estimated using a Panel Vector Error Correction Model and a Cross-Sectionally Augmented ARDL framework point to bidirectional causality. Long-run coefficient estimates obtained via Dynamic Ordinary Least Squares indicate an apparent asymmetry. Increases in dollarization exert a substantial and economically significant effect on macroeconomic distress, whereas the long-run impact of distress on dollarization is comparatively modest. The findings suggest that dollarization functions not only as a response to macroeconomic instability but also as a structural element that intensifies inflationary pressures and labor market distortions over time. Focusing on regional patterns rather than national aggregates, the paper provides new evidence on the spatial dimension of the dollarization–instability link.
Özkul et al. (2026) studied this question.