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The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countrieses

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  • Edgar L. Feige

    (The University Wisconsin-Madison)

Abstract

This 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. Forthcoming Comparative Economic Studies, Fall, 2003

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0305003.

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Length: 35 pages
Date of creation: 05 May 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0305003

Note: Type of Document - pdf; prepared on IBM PC ; to print on HP/PostScript pdf file; pages: 35; figures: included. 35 page pdf file with figures
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Web page: http://128.118.178.162

Related research

Keywords: dollarization; euroization; transition economies; currency substitution; asset substitution; underground economies; foreign currency; network externalities; irreversibility.;

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References

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  1. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-36.
  2. 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.
  3. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
  4. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
  5. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  6. Edgar L. Feige & Michael Faulend & Velimir Sonje & Vedran Sosic, 2001. "Currency Substitution, Unoffical Dollarization and Estimates of Foreign Currency Held Abroad: The Case of Croatia," International Finance 0106001, EconWPA.
  7. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
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Citations

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Cited by:
  1. Feige, Edgar L. & Urban, Ivica, 2007. "Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP?," MPRA Paper 7345, University Library of Munich, Germany.
  2. Bartzsch, Nikolaus & Rösl, Gerhard & Seitz, Franz, 2013. "Currency movements within and outside a currency union: The case of Germany and the euro area," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 393-401.
  3. Marina Tkalec, 2012. "The Dynamics of Deposit Euroization in European Post-transition Countries: Evidence from Threshold VAR," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(3), pages 278-296, July.
  4. Helmut Stix, 2012. "Why Do People Save in Cash? Distrust, Memories of Banking Crises, Weak Institutions and Dollarization," Working Papers 178, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Doris Ritzberger-Grünwald & Helmut Stix, 2007. "Are Euro Cash Holdings in Central and Eastern Europe Driven by Experience or Anticipation? Results from an OeNB Survey," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1.
  6. Smirnova, Natalia V., 2003. "Job search behavior of unemployed in Russia," BOFIT Discussion Papers 13/2003, Bank of Finland, Institute for Economies in Transition.
  7. Tigran Poghosyan & Evzen Kocenda, 2006. "Foreign Exchange Risk Premium Determinants: Case of Armenia," William Davidson Institute Working Papers Series wp811, William Davidson Institute at the University of Michigan.
  8. Georgy Idrisov & Lev Freinkman, 2009. "Modeling the Currency Structure of Bank Deposits: Does the Ratchet Effect Matter?," Working Papers 0005, Gaidar Institute for Economic Policy, revised 2009.
  9. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
  10. 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.
  11. 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.
  12. Vladimir Gligorov, 2004. "Southeast Europe: Regional Cooperation with Multiple Equilibria," wiiw Balkan Observatory Working Papers 058, The Vienna Institute for International Economic Studies, wiiw.

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