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Unofficial Dollarization in Latin America: Currency Substitution, Network Externalities and Irreversibility

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Author Info

  • Edgar L. Feige

    (The University of Wisconsin-Madison)

  • Vedran Šošiæ

    (Croatian National Bank)

  • Michael Faulend

    (Croatian National Bank)

  • Velimir Šonje

    (Reifseinen Bank)

Abstract

We examine the extent, causes and consequences of the use of foreign currency as a co-circulating medium of exchange and store of value in Latin America. Using new estimates of the amount of foreign currency in circulation in the form of US dollars, we obtain unique measures of currency substitution, asset substitution, dollarization, and bank credibility for many Latin American countries. We also specify and estimate demand functions for foreign currency in circulation in Argentina in order to examine the dynamic consequences of network externalities for hysteresis and irreversibility.

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File URL: http://128.118.178.162/eps/if/papers/0205/0205002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0205002.

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Length: 28 pages
Date of creation: 10 May 2002
Date of revision:
Handle: RePEc:wpa:wuwpif:0205002

Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP/PostScript; pages: 28 ; figures: included. Forthcoming in James W. Dean, Dominick Salvatore and Thomas Willett, eds. The Dollarization Debate, New York: Oxford University Press, 2002
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Web page: http://128.118.178.162

Related research

Keywords: unofficial de facto dollarization; Latin America; currency substitution; asset substitution; foreign currency; network externalities; Argentina; irreversibility; underground economy;

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References

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  1. Ricardo Hausmann & Michael Gavin & Carmen Pagés-Serra & Ernesto H. Stein, 1999. "Financial Turmoil and Choice of Exchange Rate Regime," Research Department Publications 4170, Inter-American Development Bank, Research Department.
  2. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, EconWPA.
  3. Edgar L. Feige, 2005. "The Anatomy Of The Underground Economy," Macroeconomics 0502011, EconWPA.
  4. Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA.
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Citations

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Cited by:
  1. Nannette Lindenberg & Frank Westermann, 2012. "How strong is the case for dollarization in Central America? An empirical analysis of business cycles, credit market imperfections and the exchange rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(2), pages 147-166, 04.
  2. Garcia Rocabado, Daniel, 2010. "The road to monetary union in Latin America: An EMS-type fixed exchange rate system as an intermediate step," W.E.P. - Würzburg Economic Papers 85, University of Würzburg, Chair for Monetary Policy and International Economics.
  3. Stix, Helmut, 2013. "Why do people save in cash? Distrust, memories of banking crises, weak institutions and dollarization," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4087-4106.
  4. Adenutsi, Deodat E., 2007. "The policy dilemma of economic openness and seigniorage-maximizing inflation in dollarised developing countries: The Ghanaian experience," MPRA Paper 37134, University Library of Munich, Germany.
  5. Pang, Xiaobo & Huang, Weiting, 2005. "货币替代中的价值效应与网络效应
    [Value effect and network effect in the process of currency substitution]
    ," MPRA Paper 11627, University Library of Munich, Germany, revised May 2007.
  6. repec:wii:bpaper:bowp:071 is not listed on IDEAS
  7. Kenneth P. Jameson, 2003. "Is It Possible to De-Dollarize? : The Case of Ecuador," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 33(1), pages 42-60, April.
  8. Adenutsi, Deodat E. & Yartey, Charles A., 2007. "Financial sector development and the macrodynamics of ‘de facto’ dollarisation in developing countries: the case of Ghana," MPRA Paper 29333, University Library of Munich, Germany.
  9. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
  10. Edgar Feige & James Dean, 2002. "Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substitution, Network Externalities and Irreversibility," International Finance 0205003, EconWPA.

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