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Determinants of Currency Substitution/Dollarization – The Case of the Republic of Serbia

  • Ivan Milenković


    (University of Priština, Faculty of Economics Kosovska Mitrovica, Associate Professor; and University of Novi Sad,Faculty of Economics Subotica, Assistant Professor)

  • Milivoje Davidović


    (University of Novi Sad,Faculty of Economics Subotica, Teaching Assistant)

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    Currency substitution/dollarization is a serious limiting factor for effective monetary policy, especially in transition economies. In addition, there is a negative impact of currency substitution on the banking industry, which is visible in the eroding quality of its lending due to indexation in debts of firms and individuals in foreign currency. Therefore, this paper analyzes the particular relevance of a currency substitution/dollarization phenomenon(s) in the case of the Republic of Serbia. We initially discuss various approaches and definitions of currency substitution and dollarization that found in the literature. Subsequently, we discuss the role of currency substitution in small and open economies in transition with some illustrations relating to the Republic of Serbia - we distinguish and analyze a locally and globally substituting currency from the substituted one and the consequences of euroization.

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    Article provided by Central bank of Montenegro in its journal Journal of Central banking Theory and Practice.

    Volume (Year): 2 (2013)
    Issue (Month): 1 ()
    Pages: 139-155

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    Handle: RePEc:cbk:journl:v:2:y:2013:i:1:p:139-155
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    1. Barro, Robert & Alesina, Alberto, 2002. "Currency Unions," Scholarly Articles 4551795, Harvard University Department of Economics.
    2. Elisabeth Beckmann & Thomas Scheiber, 2012. "Not So Trustworthy Anymore? The Euro as a Safe Haven Asset in Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 65-71.
    3. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Stabilization policy and the costs of dollarization," Proceedings, Federal Reserve Bank of Cleveland, pages 482-517.
    4. Silvana Tenreyro & Robert J. Barro, 2003. "Economic Effects of Currency Unions," NBER Working Papers 9435, National Bureau of Economic Research, Inc.
    5. Miguel Lebre de Freitas & Francisco José Veiga, 2006. "Currency substitution, portfolio diversification, and money demand," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 719-743, August.
    6. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    7. 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.
    8. Selcuk, Faruk, 2003. "Currency substitution: new evidence from emerging economies," Economics Letters, Elsevier, vol. 78(2), pages 219-224, February.
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