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

Listed author(s):
  • 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.

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Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 24 (2009)
Issue (Month): ()
Pages: 597-633

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Handle: RePEc:ris:integr:0487
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