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Choice of the substitution currency in Russia: How to explain the dollar's dominance?

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  • Dorbec, Anna

    ()
    (University of Paris X Nanterre)

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    Abstract

    The analysis of external economic relations of Russia reveals a paradox: while Europe is the main trade and direct investment partner of Russia, this is far from being the case concerning its currency’s role in Russia's financial activities. The dollar is much preferred by economic agents for financial operations. This paper proposes a disaggregated approach to this issue by separating the ‘means of exchange’ and ‘store of value’ components of the use of substitution currencies. The influence of three main factors (inertial component, real trade relations and exchange rate fluctuations) on the relative demand for the euro by Russian economic agents is tested for the period 1999-2004. Finally we suggest a theoretical interpretation of the results based on the conventions theory approach.

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    File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp1505.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 15/2005.

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    Length: 43 pages
    Date of creation: 01 Dec 2005
    Date of revision:
    Handle: RePEc:hhs:bofitp:2005_015

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    Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
    Phone: + 358 10 831 2268
    Fax: + 358 10 831 2294
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    Web page: http://www.suomenpankki.fi/bofit_en/
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    Related research

    Keywords: dollarisation; euroisation; transition; Russia; currency substitution; asset substitution; network externalities; hysteresis; conventions;

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    References

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    1. Pablo Druck & Eduardo Morón & Ernesto Stein, 2001. "The Twin Risks in the Dollarization Debate: Country and Devaluation Risks," CEMA Working Papers: Serie Documentos de Trabajo. 198, Universidad del CEMA.
    2. Dornbusch, Rudiger & Reynoso, Alejandro, 1989. "Financial Factors in Economic Development," American Economic Review, American Economic Association, vol. 79(2), pages 204-09, May.
    3. Joannes Mongardini & Johannes Mueller, 2000. "Ratchet Effects in Currency Substitution: An Application to the Kyrgyz Republic," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 3.
    4. Epstein, Larry G, 1999. "A Definition of Uncertainty Aversion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 579-608, July.
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    Cited by:
    1. Adeniji, Sesan, 2013. "Investigating the Relationship between Currency Substitution, Exchange Rate and Inflation in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach," MPRA Paper 52551, University Library of Munich, Germany, revised 28 Dec 2013.
    2. Harrison , Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy: The case of Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 3/2007, Bank of Finland, Institute for Economies in Transition.

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