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Dollarization in transition economies: Evidence and policy implications

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  • Sahay, Ratna
  • Vegh, Carlos

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 University Library of Munich, Germany in its series MPRA Paper with number 20490.

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Date of creation: Sep 1995
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Handle: RePEc:pra:mprapa:20490

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Keywords: currency substitution; dollarization; transition economies; stabilization; inflation;

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References

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  1. Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August.
  2. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
  3. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
  4. Johannes Mueller, 1994. "Dollarization in Lebanon," IMF Working Papers 94/129, International Monetary Fund.
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  8. Mohamed El-Erian, 1988. "Currency Substitution in Egypt and the Yemen Arab Republic: A Comparative Quantitative Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 85-103, March.
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  11. Calvo, Guillermo A & Vegh, Carlos A, 1995. "Fighting Inflation with High Interest Rates: The Small Open Economy Case under Flexible Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 49-66, February.
  12. Bijan B. Aghevli & Eduardo Borensztein & Tessa Van der Willigen, 1992. "Stabilization and Structural Reform in the Czech and Slovak Federal Republic," IMF Occasional Papers 92, International Monetary Fund.
  13. 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.
  14. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
  15. Carlos A. Végh Gramont & Ratna Sahay, 1995. "Inflation and Stabilization in Transition Economies," IMF Working Papers 95/8, International Monetary Fund.
  16. 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.
  17. Friedman, Benjamin M., 1990. "Targets and instruments of monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 22, pages 1185-1230 Elsevier.
  18. 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.).
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Citations

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Cited by:
  1. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
  2. Harrison , Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy: The case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland, Institute for Economies in Transition.
  3. Vetlov, Igor, 2001. "Dollarization in Lithuania: An Econometric Approach," BOFIT Discussion Papers 1/2001, Bank of Finland, Institute for Economies in Transition.
  4. Luoana D. Santarossa, 2001. "Arrears as a Sign of Financial Repression in Transition Economies - The Case of Romania," CERT Discussion Papers 0104, Centre for Economic Reform and Transformation, Heriot Watt University.
  5. 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) 613, University of Warwick, Department of Economics.
  6. Henrik Müller, 1999. "From dollarisation to euroisation," Intereconomics: Review of European Economic Policy, Springer, vol. 34(6), pages 286-296, November.
  7. 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) 614, University of Warwick, Department of Economics.
  8. 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.
  9. International Monetary Fund, 2002. "Macroeconomic Adjustment in a Highly Dollarized Economy," IMF Working Papers 02/92, International Monetary Fund.
  10. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
  11. Oscar Lora Rocha, 1999. "Ventajas de mantener la moneda nacional en Bolivia," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 2(2), pages 41-86, December.

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