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Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries

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  • Edgar L Feige

    ()
    (University of Wisconsin-Madison, Social Science Building, 6118 Old Sauk Road, Madison, WI 53705, USA.)

Abstract

This paper presents new evidence on the dynamics of dollarisation and euroisation for 25 transition countries. Estimates of the amount of foreign currency in circulation (FCC) in transition countries are used to develop a new comprehensive dollarisation index (CDI) and separate indices of currency substitution (CSI) and asset substitution. When the CDI is compared to the traditional dollarisation index that relies solely on foreign currency deposits as a proxy for the extent of dollarisation, I find that the comprehensive dollarisation measure provides a more complete picture of the extent of de facto dollarisation and euroisation, and that it better reflects the separate influences of currency substitution and asset substitution. I find that the dynamic evolution of currency substitution and asset substitution in transition countries is both more variable and complex than is usually believed to be the case. These new dollarisation indicators enable researchers to examine the causes of the dollarisation process and its tendency to lead to irreversibility (hysteresis). Moreover, the currency substitution and asset substitution indices shed light on the dynamic consequences of these processes for the effectiveness of monetary policy. Finally, the new estimates of FCC make possible the measurement of effective currency/deposit ratios that can be used to develop new estimates of the size and growth of underground economies in transition countries. Comparative Economic Studies (2003) 45, 358–383. doi:10.1057/palgrave.ces.8100019

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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: 358-383

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Handle: RePEc:pal:compes:v:45:y:2003:i:3:p:358-383

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Cited by:
  1. Doris Ritzberger-Grünwald & Thomas Scheiber, 2012. "Euro Cash in Central, Eastern and Southeastern Europe," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 41–55.
  2. Elisabeth Beckmann & Sandra Dvorsky & Thomas Scheiber, 2011. "OeNB Euro Survey: Growing Uncertainty, but Overall Euroization Not Affected," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4.
  3. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Stix, Helmut, 2013. "Why do people save in cash? Distrust, memories of banking crises, weak institutions and dollarization," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4087-4106.
  5. repec:wii:bpaper:bowp:071 is not listed on IDEAS
  6. Thomas Scheiber & Helmut Stix, 2009. "Euroization in Central, Eastern and Southeastern Europe – New Evidence On Its Extent and Some Evidence On Its Causes," Working Papers 159, Oesterreichische Nationalbank (Austrian Central Bank).
  7. Quintano, Claudio & Mazzocchi, Paolo, 2013. "The shadow economy beyond European public governance," Economic Systems, Elsevier, vol. 37(4), pages 650-670.
  8. repec:onb:oenbwp:y::i:159:b:1 is not listed on IDEAS
  9. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
  10. Maurel Mathilde, 2004. "Financial integration, exchange rate regimes in CEECs, and joining the EMU : Just do it..," Cahiers de la Maison des Sciences Economiques j04027a, Université Panthéon-Sorbonne (Paris 1).

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