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Dollarization in Lithuania: An Econometric Approach

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Author Info
Vetlov, Igor () (BOFIT)

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Abstract

The paper analyses the factors driving dollarization in Lithuania during the period from December 1992 to August 2000. Starting with a brief overview of the major economic and political developments in Lithuania, the study attempts to model the process of dollarization by applying rigorous time series analysis. In particular, it investigates the long- and short-run properties of the relationship between the dollarization ratio and interest rates paid on domestic and foreign currency deposits. The study identifies a relatively stable cointegrating relationship between variables, whereby the dollarization ratio is negatively related to the interest rate spread. In the constructed vector error correction model, the deviations from the long-run relationship are found be significant for the dynamics of all three variables. Overall, the model explains the development of dollarization rather well. Simple specification of the model is possible when interest rates reflect the major economic and political events relevant to the process of dollarization.

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Publisher Info
Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 1/2001.

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Length: 61 pages
Date of creation: 29 Mar 2001
Date of revision:
Handle: RePEc:hhs:bofitp:2001_001

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Related research
Keywords: dollarization; transition economy; currency board; unit roots; cointegration; vector error-correction;

Other versions of this item:

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September. [Downloadable!] (restricted)
    Other versions:
  2. Boyer, Russell S. & Kingston, Geoffrey H., 1987. "Currency substitution under finance constraints," Journal of International Money and Finance, Elsevier, vol. 6(3), pages 235-250, September. [Downloadable!] (restricted)
  3. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 280-304.
  4. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238. [Downloadable!] (restricted)
    Other versions:
  5. Ernesto Hernández-Catá, 1999. "Price Liberalization, Money Growth, and Inflation During the Transition to a Market Economy," IMF Working Papers 99/76, International Monetary Fund.
  6. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries - An Introduction," IMF Working Papers 92/40, International Monetary Fund.
  7. Luis Catão & Marco Terrones, 2000. "Determinants of Dollarization - The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  8. Sarajevs, Vadims, 2000. "Econometric Analysis of Currency Substitution: A Case of Latvia," BOFIT Discussion Papers 4/2000, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  9. Rebelo, Sérgio, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," CEPR Discussion Papers 1220, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Calvo, Guillermo A., 1985. "Currency substitution and the real exchange rate: the utility maximization approach," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 175-188, June. [Downloadable!] (restricted)
  11. Ratna Sahay & Carlos A. Végh Gramont, 1995. "Dollarization in Transition Economies: Evidence and Policy Implications," IMF Working Papers 95/96, International Monetary Fund.
  12. Aarle, B. van & Budina, N., 1995. "Currency Substitution in Eastern Europe," Discussion Paper 2, Tilburg University, Center for Economic Research. [Downloadable!]
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  13. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June. [Downloadable!] (restricted)
  14. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416. [Downloadable!] (restricted)
  15. Ortiz, Guillermo, 1983. "Currency Substitution in Mexico: The Dollarization Problem," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(2), pages 174-85, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Heimonen, Kari, 2001. "Substituting a Substitute Currency – The Case of Estonia," BOFIT Discussion Papers 11/2001, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  2. Piontkovsky Ruslan, 2003. "Dollarization, Inflation Volatility and Underdeveloped Financial Markets in Transition Economies," EERC Working Paper Series 03-02e, EERC Research Network, Russia and CIS. [Downloadable!]
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