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Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries

Author

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  • Edgar L Feige

    (University of Wisconsin-Madison, Social Science Building, 6118 Old Sauk Road, Madison, WI 53705, USA.)

Abstract

This paper presents new evidence on the dynamics of dollarisation and euroisation for 25 transition countries. Estimates of the amount of foreign currency in circulation (FCC) in transition countries are used to develop a new comprehensive dollarisation index (CDI) and separate indices of currency substitution (CSI) and asset substitution. When the CDI is compared to the traditional dollarisation index that relies solely on foreign currency deposits as a proxy for the extent of dollarisation, I find that the comprehensive dollarisation measure provides a more complete picture of the extent of de facto dollarisation and euroisation, 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 dollarisation indicators enable researchers to examine the causes of the dollarisation 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. Comparative Economic Studies (2003) 45, 358–383. doi:10.1057/palgrave.ces.8100019

Suggested Citation

  • Edgar L Feige, 2003. "Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 45(3), pages 358-383, September.
    • Handle: RePEc:pal:compes:v:45:y:2003:i:3:p:358-383
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    JEL classification:

    • F3 - International Economics - - International Finance
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • F3 - International Economics - - International Finance
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions

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