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Currency substitution in a de-dollarizing economy: The case of Russia

  • Harrison , Barry

    ()

    (BOFIT)

  • Vymyatnina, Yulia

    ()

    (BOFIT)

Currency substitution, the use of foreign money to finance transactions between domestic residents, is a common feature of emerging market economies. Currency substitution re-duces the stability of money demand functions in ways that can seriously undermine cen-tral bank credibility and its efforts to implement monetary policy. Most transition econo-mies, including Russia, experienced widespread currency substitution in the early phase of transition. Following Russia’s financial meltdown in 1998, its monetary authorities intro-duced a raft of changes that substantially improved the stability and performance of the macroeconomy and reduced currency substitution. This paper investigates currency substi-tution in the Russian economy in the post-crisis period of 1999–2005. Several measures of currency substitution and different modelling frameworks consistently suggest an on-going decline in currency substitution, a shift that has important implications for Russian mone-tary policy.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp0307.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 3/2007.

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Length: 42 pages
Date of creation: 02 Mar 2007
Date of revision:
Handle: RePEc:hhs:bofitp:2007_003
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  1. Dorbec, Anna, 2005. "Choice of the substitution currency in Russia: How to explain the dollar's dominance?," BOFIT Discussion Papers 15/2005, Bank of Finland, Institute for Economies in Transition.
  2. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries; An Introduction," IMF Working Papers 92/40, International Monetary Fund.
  3. Franziska Ohnsorge & Nienke Oomes, 2005. "Money Demand and Inflation in Dollarized Economies; The Case of Russia," IMF Working Papers 05/144, International Monetary Fund.
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  8. Lubos Komarek & Martin Melecky, 2001. "Currency Substitution in the Czech Republic 1993-2001," Archive of Monetary Policy Division Working Papers 2001/40, Czech National Bank.
  9. Luboš Komárek & Martin Meleck�, 2003. "Currency Substitution in a Transitional Economy with an Application to the Czech Republic," Eastern European Economics, M.E. Sharpe, Inc., vol. 41(4), pages 72-99, July.
  10. Gruben, William C & Welch, John H, 1996. "Default Risk and Dollarization in Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 393-401, August.
  11. Marquez, Jaime, 1987. "Money demand in open economies: A currency substitution model for Venezuela," Journal of International Money and Finance, Elsevier, vol. 6(2), pages 167-178, June.
  12. 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.
  13. Miguel Lebre de Freitas, 2003. "Currency substitution and money demand in Euroland," NIPE Working Papers 11/2003, NIPE - Universidade do Minho.
  14. Michael D. Bordo & Ehsan U. Choudhri, 1980. "Currency Substitution and the Semand for Money: Some Evidence for Canada," UCLA Economics Working Papers 190, UCLA Department of Economics.
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  18. Edgar L. Feige & Michael Faulend & Velimir Sonje & Vedran Sosic, 2001. "Currency Substitution, Unoffical Dollarization and Estimates of Foreign Currency Held Abroad: The Case of Croatia," International Finance 0106001, EconWPA.
  19. repec:dgr:kubcen:19952 is not listed on IDEAS
  20. Mizen, Paul & Pentecost, Eric J, 1994. "Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe," Economic Journal, Royal Economic Society, vol. 104(426), pages 1057-69, September.
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  23. Miriam Chau RodrIGuez & Paul Turner, 2003. "Currency substitution and the demand for money in Mexico," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 59-62.
  24. Faruk Seļuk, 1997. "GMM estimation of currency substitution in a high-inflation economy: evidence from Turkey," Applied Economics Letters, Taylor & Francis Journals, vol. 4(4), pages 225-227.
  25. Melvin, Michael, 1988. "The Dollarization of Latin America as a Market-Enforced Monetary Reform: Evidence and Implications," Economic Development and Cultural Change, University of Chicago Press, vol. 36(3), pages 543-58, April.
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  27. Bufman, G. & Leiderman, L., 1992. "Simulating an Optimizing Model of Currency Substitution," Papers 6-92, Tel Aviv - the Sackler Institute of Economic Studies.
  28. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
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