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Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?

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  • LULA G. MENGESHA

    (University of Waikato)

  • MARK J. HOLMES

    (University of Waikato)

Abstract

Relying on hard currency or dollarizing an economy has been a common practice of many developing countries taking the form of dollarizing bank deposits and loans, settling transactions in dollars and the indexation of wages and prices in dollars. The relationship between dollarization and exchange rate volatility is both theoretically and empirically unresolved. While the effect of such practices has been the focus of numerous investigations, such studies have concentrated on the Latin American and Asian economies. This paper contributes to the limited research on the African economies by specifically investigating the consequences of dollarization on Eritrean exchange rate volatility. Using quarterly official and black market exchange rate data for the study period 1996-2008, E-GARCH analysis suggests that dollarization has a positive impact on real exchange rate volatility.

Suggested Citation

  • Lula G. Mengesha & Mark J. Holmes, 2013. "Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 99-118, June.
    • Handle: RePEc:jed:journl:v:38:y:2013:i:2:p:99-118
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    2. Ruby NGAMANYA MUNHUPEDZI & A.M. CHIDAKWA, 2017. "Investigating the Impact of Dollarisation on Economic Growth - A Case of Zimbabwe," Expert Journal of Finance, Sprint Investify, vol. 5, pages 11-20.
    3. Mr. Juan S Corrales & Patrick A. Imam, 2019. "Financial Dollarization of Households and Firms: Does It Differ?," IMF Working Papers 2019/019, International Monetary Fund.
    4. A.M. CHIDAKWA & Ruby NGAMANYA MUNHUPEDZI, 2017. "Investigating the Impact of Dollarization on Economic Growth: A Case of Zimbabwe," Expert Journal of Finance, Sprint Investify, vol. 5(1), pages 12-20.
    5. Juan‐Sebastian Corrales & Patrick Amir Imam, 2021. "Financial dollarization of households and firms: How does it differ by level of economic development?," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 927-978, September.
    6. Patrick Amir Imam, 2022. "De‐dollarization in Zimbabwe: What lessons can be learned from other sub‐Saharan countries?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 770-801, January.
    7. Musoke, Zakia, 2017. "An empirical investigation on dollarization and currency devaluation: A case study of Tanzania," Economics Discussion Papers 2017-8, Kiel Institute for the World Economy (IfW Kiel).
    8. Ruby NGAMANYA MUNHUPEDZI & A.M. CHIDAKWA, 2017. "Investigating the Impact of Dollarisation on Economic Growth - A Case of Zimbabwe," Expert Journal of Finance, Sprint Investify, vol. 5, pages 11-20.

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    More about this item

    Keywords

    Dollarization; Exchange Rate Volatility; Eritrea; Official and Black Market;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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