The Relation between currency substıtution and inflation

118ABSTRACTCurrency substitution refers to a process during which a nationalcurrency is substituted by a foreign currency as a result of the fall in thatnational currency. This concept has come to the fore with the introduction ofvolatile currency since the early 1970s after the collapse of Bretton Woods?fixed currency system, in particular. People are inclined to keep less nationalcurrency in their portfolio due to the erosion in their own currency. In thisstudy, foreign currency replacing national currency has been dealt with, andits relation to existing economic policy and inflation has been examined.The process of currency substitution in our country actuallyaccelerated with the abolishment of the ban on possessing foreign currencyof the citizens and the total freedom of exchange transactions. The increasein the public financing requirement especially in the late 1980s and theincreasing use of internal borrowing led to an increase in inflation rates andthus in foreign currency accounts. A general increase in prices resulted inthe decrease in the value of the national currency and created a demand forforeign currencies so that economic units could protect their income andwealth against inflation.In an environment where currency substitution becomes prevalent ithas become difficult to administer and direct economy policies while amonetary volume which the country cannot control. Furthermore, as therelation between currencies in terms of substitution ability increases, foreigncurrencies become more unstable. In fact, currency substitution as a meansof protection against inflation makes inflation continuous. Foreign currencywhich rose together with the increase in inflation especially after the year2000 could not, as a result of racket effect, follow the declining trend ininflation during periods when inflation declined.