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Currency Substitution, Unoffical Dollarization and Estimates of Foreign Currency Held Abroad: The Case of Croatia

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Author Info

  • Edgar L. Feige

    (The University of Wisconsin-Madison)

  • Michael Faulend

    (Croatian National Bank)

  • Velimir Sonje

    (Croatian National Bank)

  • Vedran Sosic

    (Croatian National Bank)

Abstract

This paper employs new estimates of US currency held abroad to determine the degree of unofficial or de facto dollarization that has taken place in key countries around the world. Empirical estimates of foreign currency in circulation permits refined definitions of unofficial dollarization indices as well as new measures of currency and asset substitution and bank credibility indices. The new unofficial dollarization indices are compared to the commonly used IMF dollarization measures and are shown to be superior. The paper then examines the problem of estimating the unobserved amounts of European currencies [particularly the Deutsche mark (DM)] that circulate as second currencies in many Central and Eastern European nations. A denomination displacement method and a money demand method are employed to estimate the unobserved quantity of DM circulating in Croatia. The final section calls attention to the importance of monitoring the historic experiment that will take place when the Euro currency is introduced on January 1, 2002. In particular, it calls for a data collection mechanism capable of measuring the extent to which the new Euro currency substitutes for the local currencies of Central and Eastern European transition countries.

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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0106001.

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Date of creation: 06 Jun 2001
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Handle: RePEc:wpa:wuwpif:0106001

Note: Type of Document - pdf; prepared on IBMPC
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Web page: http://128.118.178.162

Related research

Keywords: Currency Substitution; Unofficial Dollarization; Defacto dollarization; asset substitution; exchange rate policy; Euro currency; foreign currency circulating abroad; irreversibility; hysteresis; network externalities.;

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Cited by:
  1. Helmut Stix, 2001. "Survey Results about Foreign Currency Holdings in Five Central and Eastern European Countries," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 41-48, 02.
  2. Valev, Neven T., 2010. "The hysteresis of currency substitution: Currency risk vs. network externalities," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 224-235, March.
  3. Buiter, Willem H., 2009. "Negative nominal interest rates: Three ways to overcome the zero lower bound," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 213-238, December.
  4. Edgar L. Feige, 2003. "The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countrieses," Macroeconomics 0305003, EconWPA.
  5. 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.
  6. Yinusa, D. Olalekan & Akinlo, A.E., 2008. "Exchange Rate Volatility and the extent of Currency Substitution in Nigeria," MPRA Paper 16257, University Library of Munich, Germany.
  7. Lubos Komarek & Martin Melecky, 2001. "Currency Substitution in the Czech Republic 1993-2001," Archive of Monetary Policy Division Working Papers 2001/40, Czech National Bank.
  8. Oomes, Nienke & Ohnsorge, Franziska, 2005. "Money demand and inflation in dollarized economies: The case of Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 462-483, September.
  9. Ainura Uzagalieva, 2005. "Fiscal Consequences of Monetary Integration within the Common Economic Area: the Case of Belarus, Kazakhstan and Russia," CERGE-EI Working Papers wp254, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  10. Seater, John J., 2008. "The Demand for Currency Substitution," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(35), pages 1-30.
  11. repec:wii:bpaper:bowp:071 is not listed on IDEAS
  12. Murray, John & Powell, James, 2003. "Dollarization in Canada: where does the buck stop?," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 145-172, August.
  13. Edgar Feige & James Dean, 2002. "Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substitution, Network Externalities and Irreversibility," International Finance 0205003, EconWPA.
  14. John Murray & James Powell, 2002. "Dollarization in Canada: The Buck Stops There," Technical Reports 90, Bank of Canada.
  15. 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.
  16. 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.

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