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Dollarization as an Investment Signal in Developing Countries: The Case of Croatia, Czech Republic, Peru, Slovak Republic and Turkey

  • Emre Ozsoz

    (Fordham University, Department of Economics)

  • Erick W. Rengifo

    (Fordham University, Department of Economics)

  • Dominick Salvatore

    (Fordham University, Department of Economics)

In dollarized financial systems, there exists a currency mismatch risk that could lead to financial crises. Central Banks in such economies have to adjust their foreign currency policies accordingly. This paper estimates the probability of Central Bankers' intervention in the foreign currency markets in dollarized economies as explained by the volatility measures of the local exchange rate. By employing data from five countries, we show that in controlled inflation environments, not only Central Banks' interventions but also the direction of the interventions can be predicted to a good degree while under high inflation our model fails to provide healthy results.

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File URL: http://legacy.fordham.edu/images/academics/graduate_schools/gsas/economics/dp2008_16_ozsoz_rengifo_salvatore.pdf
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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-16.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-16
Contact details of provider: Web page: http://www.fordham.edu/economics/
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  1. Balázs Égert, 2006. "Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies," Working Papers 134, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.
  3. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella.
  4. Raghuram G. Rajan, 2004. "Dollar Shortages and Crises," NBER Working Papers 10845, National Bureau of Economic Research, Inc.
  5. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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