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Network Externalities and Dollarization Hysteresis

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  • Nienke Oomes

Abstract

Dollarization in Russia increased rapidly during the early 1990s, but failed to come down in the second half of the 1990s in spite of exchange rate stabilization. To explain this "dollarization hysteresis," this paper develops a model in which network externalities in the demand for currency can generate multiple stable steady states for the dollarization ratio. The model is estimated using a new source of data on dollar currency holdings in Russia. On the basis of these estimates, which confirm the existence of network externalities, the paper discusses several policies that could result in a permanent decrease in dollarization.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/96.

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Length: 36
Date of creation: 01 May 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/96

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Related research

Keywords: Dollarization; Currency substitution; Economic models; probability; equation; heteroscedasticity; exchange rate depreciation; standard errors; survey; empirical estimation; autocorrelation; independent variable; correlation; functional form; statistic; estimation procedure; binary choice; capital flight; goodness of fit; law of large numbers; time series; nonlinear relationship; econometrics; financial statistics; statistical significance; binary choice model; number of variables; functional forms; currency depreciation; statistics; covariance;

References

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  1. Bettina Peiers & Jeffrey M. Wrase, 1997. "Dollarization hysteresis and network externalities: theory and evidence from an informal Bolivian credit market," Working Papers 97-21, Federal Reserve Bank of Philadelphia.
  2. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Stabilization Policy and the Costs of Dollarization," Departmental Working Papers 200006, Rutgers University, Department of Economics.
  4. Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
  5. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 1-84.
  6. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," NBER Working Papers 10015, National Bureau of Economic Research, Inc.
    • Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," CEMA Working Papers 594, China Economics and Management Academy, Central University of Finance and Economics.
  7. 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.
  8. Miguel A. Savastano, 1996. "Dollarization in Latin America," IMF Working Papers 96/4, International Monetary Fund.
  9. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, EconWPA.
  10. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
  11. Aiyagari, S Rao & Wallace, Neil, 1992. "Fiat Money in the Kiyotaki-Wright Model," Economic Theory, Springer, vol. 2(4), pages 447-64, October.
  12. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  13. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
  14. Federico A. Sturzenegger, 1992. "Currency Substitution and the Regressivity of Inflationary Taxation," UCLA Economics Working Papers 656, UCLA Department of Economics.
  15. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
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