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Currency Substitution and Central Bank Independence in the Central and Eastern European Economies


  • Bouyon, Sylvain

    () (Université Lille I)


This paper examines the extent to which the confrontation between the authorities implementing the monetary policy and the private agents asking for foreign currencies can influence the global process of currency substitution. The choice of an appropriate monetary policy depends on an original timeinconsistency problem where a partly-independent and conservative central bank is faced with a type of monetary targeting. The motives of the private agents in asking for foreign currencies are precautionary and/or speculative. We obtain the optimal growth of the aggregate in foreign currencies, which negatively depends on transparency, central bank credibility and inflation instability of the economy linked with the currency, and positively on inflation instability of the domestic economy. Then, we propose different measures of these determinants and we econometrically test this optimum in the economies of Central and Eastern Europe. The results are consistent with empirical literature on the macroeconomic determinants of dollarization. However, in this paper, the complexity of currency substitution is better illustrated and an empirical approach in relation to the institutional determinants of currency substitution is provided.

Suggested Citation

  • Bouyon, Sylvain, 2009. "Currency Substitution and Central Bank Independence in the Central and Eastern European Economies," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 24, pages 597-633.
  • Handle: RePEc:ris:integr:0487

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    Cited by:

    1. Ichiro Iwasaki & Akira Uegaki, 2017. "Central Bank Independence and Inflation in Transition Economies: A Comparative Meta-Analysis with Developed and Developing Economies," Eastern European Economics, Taylor & Francis Journals, vol. 55(3), pages 197-235, May.

    More about this item


    currency substitution; transition economies; legal central bank independence; actual central bank independence;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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