IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20121473.html
   My bibliography  Save this paper

Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies

Author

Listed:
  • Chiţu, Livia

Abstract

This paper investigates whether, and if so why, the recent ‘Great Recession’ was more severe in unofficially dollarised/euroised economies than in other economies. To that end, the paper builds on a novel dataset on unofficial dollarisation/euroisation to test whether the latter was a determinant of the extent of the growth collapse in 2007-09 in a cross-section of around 60 emerging market economies. Both OLS and Bayesian model averaging estimates suggest that unofficial dollarisation/euroisation was an important contributor to the severity of the crisis, once other of its well-established determinants are taken into account, including fast pre-crisis credit growth, current account deficits, trade and financial openness, market regulation, international openness of the banking sector and GDP per capita. Moreover, the adverse impact of unofficial dollarisation/euroisation is found to have been transmitted through the main channels traditionally highlighted in the literature, i.e. currency mismatches, reduced monetary policy autonomy and limited lender of last resort ability, all of which became more binding constraints in the midst of the crisis. The results help to shed light on the long-standing debate regarding the conduct of monetary policy in unofficially dollarised/euroised economies in crisis times. JEL Classification: F30, G01, G21

Suggested Citation

  • Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20121473
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1473.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    4. AndrewK. Rose & MarkM. Spiegel, 2010. "Cross-Country Causes And Consequences Of The 2008 Crisis: International Linkages And American Exposure," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 340-363, August.
    5. Lo Luca, Marco & Peltonen, Tuomas, 2011. "Macro-financial vulnerabilities and future financial stress : Assessing systemic risks and predicting systemic events," BOFIT Discussion Papers 2/2011, Bank of Finland, Institute for Economies in Transition.
    6. Erik Berglof & Yevgeniya Korniyenko & Alexander Plekhanov & Jeromin Zettelmeyer, 2010. "Understanding the Crisis in Emerging Europe," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(6), pages 985-1008, September.
    7. Ehrmann, Michael & Fratzscher, Marcel & Mehl, Arnaud & Bekaert, Geert, 2011. "Global crises and equity market contagion," Working Paper Series 1381, European Central Bank.
    8. Reinhart, Carmen & Calvo, Guillermo, 1999. "Inversión de las corrientes de capital, tipo de cambio y dolarización
      [Capital Flow Reversals, the Exchange Rate Debate, and Dollarization]
      ," MPRA Paper 13692, University Library of Munich, Germany.
    9. Ethan Ilzetzki & Carmen M. Reinhart & Kenneth S. Rogoff, 2017. "Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?," NBER Working Papers 23134, National Bureau of Economic Research, Inc.
    10. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2011. "Market Freedom and the Global Recession," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(1), pages 111-135, April.
    11. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    12. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    13. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
    14. Andrew K. Rose & Mark M. Spiegel, "undated". "Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning," Working Papers 6, Department of the Treasury, Ministry of the Economy and of Finance.
    15. Michael D. Bordo & Christopher M. Meissner, 2007. "Financial Crises, 1880-1913: The Role of Foreign Currency Debt," NBER Chapters,in: The Decline of Latin American Economies: Growth, Institutions, and Crises, pages 139-194 National Bureau of Economic Research, Inc.
    16. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    17. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," Research Department Publications 4504, Inter-American Development Bank, Research Department.
    18. Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June.
    19. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 71-105, September.
    20. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    21. Michael D. Bordo & Christopher M. Meissner, 2005. "The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997," NBER Working Papers 11897, National Bureau of Economic Research, Inc.
    22. S. Pelin Berkmen & Eduardo Cavallo, 2010. "Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality?," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 781-795, November.
    23. Fratzscher, Marcel & Bussière, Matthieu & Koeniger, Winfried, 2004. "Currency mismatch, uncertainty and debt maturity structure," Working Paper Series 409, European Central Bank.
    24. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    25. Kirsanova, Tatiana & Menzies, Gordon & Vines, David, 2007. "Stiglitz Versus the IMF on the Asian Debt Crisis: An Intertemporal Model with Real Exchange Rate Overshooting," CEPR Discussion Papers 6318, C.E.P.R. Discussion Papers.
    26. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    27. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2009. "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," American Economic Review, American Economic Association, vol. 99(2), pages 480-486, May.
    28. Roberto Chang & Andres Velasco, 2002. "Dollarization: Analytical Issues," NBER Working Papers 8838, National Bureau of Economic Research, Inc.
    29. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
    30. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series 1151, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jovanovic, Branimir & Petreski, Marjan, 2014. "Monetary policy, exchange rates and labor unions in SEE and the CIS during the financial crisis," Economic Systems, Elsevier, vol. 38(3), pages 309-332.
    2. Bussière, M. & Ristiniemi, A., 2012. "Credit Ratings and Debt Crises," Working papers 396, Banque de France.

    More about this item

    Keywords

    Bayesian model averaging; emerging economies; foreign currency lending; Great Recession; Unofficial dollarisation/euroisation;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20121473. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications). General contact details of provider: http://edirc.repec.org/data/emieude.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.