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Dollarisation in the Former Soviet Union: from Hysteria to Hysteresis

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  • Oleh Havrylyshyn

    ()
    (International Monetary Fund, European II Department, Room HQ 6-120, 700 19th street NW, Washington DC, 20431, USA.)

  • Christian H Beddies

    ()
    (International Monetary Fund, European II Department, Room HQ 6-120, 700 19th street NW, Washington DC, 20431, USA.)

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    Abstract

    This paper reviews evidence of dollarisation in Former Soviet Union (FSU) countries, and finds that it is still very high, the well-known hysteresis effect. However high dollarisation – defined as the use of any foreign currency – is not only due to inertial lack of confidence. There is also some tentative evidence that suggests foreign currency is used – in both cash and deposit form – as one of the very few alternative instruments for portfolio diversification in an embryonic financial market. It is also shown that, contrary to the received wisdom, high dollarisation does not seriously impede effective conduct of monetary policy: money demand in FSU countries is stabilising, and the most important objective, meaningful inflation control, has been widely achieved. Thus, high dollarisation is not per se as damaging as often thought, and in fact has a beneficial dimension in promoting financial market development. Nonetheless, high dollarisation remains a concern since it provides mechanisms for magnifying vulnerabilities in the event of a crisis even if it might not be the direct cause of a crisis. This necessarily implies that some policy options (such as immediate exchange rate devaluation) are not viable or very costly in a crisis. Comparative Economic Studies (2003) 45, 329–357. doi:10.1057/palgrave.ces.8100018

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

    Volume (Year): 45 (2003)
    Issue (Month): 3 (September)
    Pages: 329-357

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    Handle: RePEc:pal:compes:v:45:y:2003:i:3:p:329-357

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    Cited by:
    1. Kyriakos C. Neanidis & Christos S. Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0609, Economics, The University of Manchester.
    2. repec:wii:bpaper:bowp:071 is not listed on IDEAS
    3. Olga Aslanidi, 2008. "Dollarization in Transition Economies: New Evidence from Georgia," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp366, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    4. Jean-François Goux & Charbel Cordahi, 2007. "The international transmission of monetary shocks in a dollarized economy: The case of USA and Lebanon," Post-Print, HAL halshs-00174466, HAL.
    5. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 594, China Economics and Management Academy, Central University of Finance and Economics.

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