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Dollarization, Inflation Volatility and Underdeveloped Financial Markets in Transition Economies

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  • Piontkovsky Ruslan

    ()

Abstract

The paper analyzes the phenomenon of dollarization in a sample of transition economies: Ukraine, Russia, Poland, Czech Republic, Romania, Slovenia, Croatia, Latvia, and Lithuania. Using the Thomas' portfolio balance model, the author tests how the degree of dollarization depends on the relative returns on financial assets, inflation volatility, and financial market development. The main conclusion from the analysis is that relative returns on assets (bank deposits in the domestic currency relative to deposits in foreign currencies) and inflation volatility have a significant effect on dollarization. The effect of financial market development is also captured, albeit indirectly, as dollarization is found to be dependent on the country’s balance of trade (the inflow of foreign currency).

Suggested Citation

  • Piontkovsky Ruslan, 2003. "Dollarization, Inflation Volatility and Underdeveloped Financial Markets in Transition Economies," EERC Working Paper Series 03-02e, EERC Research Network, Russia and CIS.
  • Handle: RePEc:eer:wpalle:03-02e
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    References listed on IDEAS

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    1. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
    2. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-625, June.
    3. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, March.
    4. Eduardo Levy Yeyati & Alain Ize, 1998. "Dollarization of Financial Intermediation; Causes and Policy Implications," IMF Working Papers 98/28, International Monetary Fund.
    5. Vetlov, Igor, 2001. "Dollarization in Lithuania : An econometric approach," BOFIT Discussion Papers 1/2001, Bank of Finland, Institute for Economies in Transition.
    6. Liviatan, Nissan, 1981. "Monetary Expansion and Real Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1218-1227, December.
    7. John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 207-222.
    8. Andrew Berg & Eduardo Borensztein, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," Journal of Applied Economics, Universidad del CEMA, vol. 3, pages 285-324, November.
    9. Cuddington, John T. & Cuddington, John T., 1983. "Currency substitution, capital mobility and money demand," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 111-133, August.
    10. Sarajevs, Vadims, 2000. "Econometric analysis of currency substitution : A case of Latvia," BOFIT Discussion Papers 4/2000, Bank of Finland, Institute for Economies in Transition.
    11. Miles, Marc A, 1978. "Currency Substitution, Flexible Exchange Rates, and Monetary Independence," American Economic Review, American Economic Association, vol. 68(3), pages 428-436, June.
    12. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.
    13. van Aarle, B. & Budina, N., 1995. "Currency substitution in Eastern Europe," Discussion Paper 1995-2, Tilburg University, Center for Economic Research.
    14. Bufman, Gil & Leiderman, Leonardo, 1993. "Currency Substitution under Nonexpected Utility: Some Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 320-335, August.
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    Cited by:

    1. Marina Tkalec, 2012. "The Dynamics of Deposit Euroization in European Post-transition Countries: Evidence from Threshold VAR," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(3), pages 278-296, July.
    2. Marina Tkalec, 2013. "Monetary Determinants of Deposit Euroization in European Post-Transition Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(1), pages 89-101, March.

    More about this item

    Keywords

    Ukraine; Russia; dollarization; asset substitution; currency substitution; transition economies; portfolio optimization; inflation volatility;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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