The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countries
AbstractThis paper presents new evidence on the dynamics of dollarization and euroization for twenty-five transition countries. Estimates of the amount of foreign currency in circulation (FCC) in transition countries are used to develop a new comprehensive dollarization index (CDI) and separate indices of currency substitution (CSI) and asset substitution (ASI). When the CDI is compared to the traditional dollarization index (DI) that relies solely on foreign currency deposits as a proxy for the extent of dollarization, I find that the comprehensive dollarization measure provides a more complete picture of the extent of de facto dollarization and euroization, and that it better reflects the separate influences of currency substitution and asset substitution. I find that the dynamic evolution of currency substitution and asset substitution in transition countries is both more variable and complex than is usually believed to be the case. These new dollarization indicators enable researchers to examine the causes of the dollarization process and its tendency to lead to irreversibility (hysteresis). Moreover, the currency substitution and asset substitution indices shed light on the dynamic consequences of these processes for the effectiveness of monetary policy. Finally, the new estimates of FCC make possible the measurement of effective currency/deposit ratios that can be used to develop new estimates of the size and growth of underground economies in transition countries. JEL classification: E4 E5 F3 H26 K42 P2 P3 Keywords: dollarization, euroization, transition economies, currency substitution, asset substitution, underground economies, foreign currency, network externalities, irreversibility.
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Length: 35 pages
Date of creation: 27 Feb 2003
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dollarization; euroization; transition economies; currency substitution; asset substitution; underground economies; foreign currency; network externalities; irreversibility;
Other versions of this item:
- Feige,E.L., 2003. "The dynamics of currency substitution, asset substitution and de facto dollarization and euroization in transition countries," Working papers 3, Wisconsin Madison - Social Systems.
- Edgar L. Feige, 2003. "The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countrieses," Macroeconomics 0305003, EconWPA.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F3 - International Economics - - International Finance
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- P2 - Economic Systems - - Socialist Systems and Transition Economies
- P3 - Economic Systems - - Socialist Institutions and Their Transitions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-03-03 (All new papers)
- NEP-IFN-2003-03-03 (International Finance)
- NEP-LAW-2003-03-03 (Law & Economics)
- NEP-MAC-2003-03-03 (Macroeconomics)
- NEP-RMG-2003-03-03 (Risk Management)
- NEP-TRA-2003-03-03 (Transition Economics)
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