Currency Substitution and Central Bank Independence in the Central and Eastern European Economies
AbstractThis paper examines the extent to which the confrontation between the authorities implementing the monetary policy and the private agents asking for foreign currencies can influence the global process of currency substitution. The choice of an appropriate monetary policy depends on an original timeinconsistency problem where a partly-independent and conservative central bank is faced with a type of monetary targeting. The motives of the private agents in asking for foreign currencies are precautionary and/or speculative. We obtain the optimal growth of the aggregate in foreign currencies, which negatively depends on transparency, central bank credibility and inflation instability of the economy linked with the currency, and positively on inflation instability of the domestic economy. Then, we propose different measures of these determinants and we econometrically test this optimum in the economies of Central and Eastern Europe. The results are consistent with empirical literature on the macroeconomic determinants of dollarization. However, in this paper, the complexity of currency substitution is better illustrated and an empirical approach in relation to the institutional determinants of currency substitution is provided.
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Bibliographic InfoArticle provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.
Volume (Year): 24 (2009)
Issue (Month): ()
currency substitution; transition economies; legal central bank independence; actual central bank independence;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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