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Dollarization in Transition Economies

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  • Carlos A. Végh Gramont
  • Ratna Sahay

Abstract

After most restrictions on foreign currency holdings were relaxed in the early 1990s, foreign currency deposits in transition economies have been increasing rapidly. This paper takes a first look at the evidence on dollarization for 15 transition economies, and then discusses some key conceptual and policy implications. Depending on the institutional constraints, foreign currency deposits as a proportion of broad money reached a peak of between 30 and 60 percent in 1992-93. Unlike what has been observed in Latin America, however, dollarization has fallen substantially in the aftermath of successful stabilization plans in Estonia, Lithuania, Mongolia, and Poland. Since foreign currency deposits reflect mainly a portfolio choice, the fall in dollarization can be primarily attributed to higher real returns on domestic-currency assets, as a result of lower inflation and more market-determined interest rates.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 95/96.

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Length: 34
Date of creation: 01 Sep 1995
Date of revision:
Handle: RePEc:imf:imfwpa:95/96

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Cited by:
  1. Sweder van Wijnbergen & Nina Budina, 1999. "Inflation Stabilization, Fiscal Deficits and Public Debt Management in Poland," Tinbergen Institute Discussion Papers 99-022/2, Tinbergen Institute.
  2. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers, Universidad Torcuato Di Tella dieciseis, Universidad Torcuato Di Tella.
  3. Komárek Luboš & Melecký Martin, 2001. "Demand for Money in the Transition Economy : The Case of the Czech Republic 1993–2001," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 614, University of Warwick, Department of Economics.
  4. 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.
  5. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings, Econometric Society 196, Econometric Society.
  6. Vetlov, Igor, 2001. "Dollarization in Lithuania: An Econometric Approach," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 1/2001, Bank of Finland, Institute for Economies in Transition.
  7. Paul Mizen, 1996. "The behavior of foreign currency holdings during currency crises: Causes and consequences," Open Economies Review, Springer, Springer, vol. 7(1), pages 651-673, March.
  8. International Monetary Fund, 2002. "Macroeconomic Adjustment in a Highly Dollarized Economy," IMF Working Papers 02/92, International Monetary Fund.
  9. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
  10. Oscar Lora Rocha, 1999. "Ventajas de mantener la moneda nacional en Bolivia," Revista de Análisis del BCB, Banco Central de Bolivia, Banco Central de Bolivia, vol. 2(2), pages 41-86, December.
  11. Henrik Müller, 1999. "From dollarisation to euroisation," Intereconomics: Review of European Economic Policy, Springer, Springer, vol. 34(6), pages 286-296, November.
  12. Komárek Luboš & Melecký Martin, 2001. "Currency Substitution in the Transition Economy : A Case of the Czech Republic 1993-2001," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 613, University of Warwick, Department of Economics.
  13. Luoana D. Santarossa, 2001. "Arrears as a Sign of Financial Repression in Transition Economies - The Case of Romania," CERT Discussion Papers, Centre for Economic Reform and Transformation, Heriot Watt University 0104, Centre for Economic Reform and Transformation, Heriot Watt University.

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