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Dollarization as an Investment Signal in Developing Countries: The Case of Croatia, Czech Republic, Peru, Slovak Republic and Turkey

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Author Info

  • Emre Ozsoz

    (Fordham University, Department of Economics)

  • Erick W. Rengifo

    (Fordham University, Department of Economics)

  • Dominick Salvatore

    (Fordham University, Department of Economics)

Abstract

In dollarized financial systems, there exists a currency mismatch risk that could lead to financial crises. Central Banks in such economies have to adjust their foreign currency policies accordingly. This paper estimates the probability of Central Bankers' intervention in the foreign currency markets in dollarized economies as explained by the volatility measures of the local exchange rate. By employing data from five countries, we show that in controlled inflation environments, not only Central Banks' interventions but also the direction of the interventions can be predicted to a good degree while under high inflation our model fails to provide healthy results.

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Bibliographic Info

Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-16.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-16

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Web page: http://www.fordham.edu/economics/
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Keywords: Central Bank Intervention; Foreign Exchange Rates; Dollarization; Ordered Probit;

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References

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  1. Balazs Egert, 2006. "Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies," CESifo Working Paper Series 1869, CESifo Group Munich.
  2. Raghuram G. Rajan, 2004. "Dollar Shortages and Crises," NBER Working Papers 10845, National Bureau of Economic Research, Inc.
  3. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR & CES & MSH, vol. 21(45), pages 61-118, 01.
  4. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.
  5. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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Cited by:
  1. Arizmendi, Luis-Felipe, 2013. "An extended model of currency options applicable as policy tool for central banks with inflation targeting and dollarized economies," MPRA Paper 52880, University Library of Munich, Germany, revised 15 Apr 2013.
  2. Marina Tkalec, 2012. "The Dynamics of Deposit Euroization in European Post-transition Countries: Evidence from Threshold VAR," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(3), pages 278-296, July.
  3. Marina Tkalec, 2013. "Monetary Determinants of Deposit Euroization in European Post-Transition Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(1), pages 89-101, March.

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